Public Statements

Stephen Paul Dewsnip

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Stephen Paul Dewsnip (“Mr Dewsnip”)

On 27 July 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £7,000 under section 11D of the Financial Services Commission Law on Mr Dewsnip; and

2. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Dewsnip failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

Mr Dewsnip was a non-executive director of Global Insurance Group Limited (“GIGL”), which was licensed under the Insurance Law. Mr Dewsnip was a director of GIGL from 21 December 2011 to 25 August 2016.

Under an agreement between GIGL and a United Kingdom intermediary (which had some common ownership with GIGL) (“Intermediary A”), Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the July 2017 Visit”). As a result of the July 2017 Visit, the Commission had concerns over GIGL’s oversight of functions outsourced to Intermediary A, in particular the management of the Claims Fund. The Commission also found that GIGL had not conducted any audit of the activity carried out by Intermediary A and could not adequately monitor the solvency of GIGL due to the frequency of reporting from Intermediary A.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party. This called into question the liquidity of GIGL’s major asset.

Findings

As a director of GIGL, Mr Dewsnip failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Dewsnip also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner.

Aggravating Factors

The actions of Mr Dewsnip could have seriously put at risk the payment of claims to policyholders and therefore could have posed a risk to the reputation of the Bailiwick as an international finance centre.

Mitigating Factors

Mr Dewsnip accepted the findings against him and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalty imposed.

Shane Younger and Christopher Percival

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Global Insurance Group Limited (“GIGL”)
Shane Younger (“Mr Younger”)
Christopher Percival (“Mr Percival”)


On 10 July 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £48,650 under section 11D of the Financial Services Commission Law on Mr Younger;

2. To impose a financial penalty of £30,100 under section 11D of the Financial Services Commission Law on Mr Percival; and

3. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Younger and Mr Percival failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

Mr Younger and Mr Percival were non-executive directors (from 22 December 2011 to 22 February 2019 and 22 December 2011 to 14 July 2017 respectively) and the majority shareholders of Global Insurance Group Limited (“GIGL”) which was licensed under the Insurance Law. Mr Younger and Mr Percival are also Chief Executive and director of a United Kingdom insurance intermediary (“Intermediary A”) respectively. Mr Younger and Mr Percival are also minority shareholders in the ultimate holding company of Intermediary A. As a result of Mr Younger and Mr Percival’s position with Intermediary A, they had access to more information than the other GIGL directors regarding Intermediary A’s business activities related to GIGL.

Under an agreement between GIGL and Intermediary A, Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and, if due, net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the 2017 Visit”). In the period prior to the 2017 Visit, apart from the first quarterly payment to GIGL by Intermediary A, the only payments made were the exact amounts required to pay GIGL’s reinsurers. GIGL’s management accounts showed that the amounts outstanding from Intermediary A grew whilst GIGL’s cash remained low. The amounts due from Intermediary A were GIGL’s major asset.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party.

Findings

Mr Younger

During the relevant period of 2012 to February 2019:

As a non-executive director of GIGL, Mr Younger failed to ensure the implementation of effective systems of control, in particular in relation to the Claim Fund held by, and the bordereaux reporting from, Intermediary A. Whilst Mr Younger contends that other directors of GIGL were visiting Intermediary A to check the accuracy of reporting by Intermediary A, those directors claim no visits to check the accuracy of reporting took place and no reports of any checks undertaken at such visits have been provided.

As a non-executive director of GIGL, Mr Younger also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

A risk register was prepared by another director of GIGL in October 2016, which was subsequently considered by Mr Younger as a director of GIGL. Credit risk, which was defined as financial loss through counterparty failing to meet obligations, was deemed to be low likelihood and medium impact in the risk assessment.

A risk assessment of outsourced activity was also prepared by another director of GIGL in May 2018, which was again considered by Mr Younger as a non-executive director of GIGL. Again, credit risk was deemed to be low likelihood and medium impact.

Given the issues that had been ongoing since November 2015 regarding the payments due from Intermediary A and that Intermediary A was GIGL’s largest debtor, this is surprising. As a result, Mr Younger failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL.

The failures by Mr Younger outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Younger and as a result Mr Younger failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Mr Percival

During the relevant period of 2012 to July 2017:

As a non-executive director of GIGL, Mr Percival failed to ensure the implementation of effective systems of control, in particular in relation to the Claim Fund held by, and the bordereaux reporting from, Intermediary A. Whilst Mr Percival contends that other directors of GIGL were visiting Intermediary A to check the accuracy of reporting by Intermediary A, those directors claim no visits to check the accuracy of reporting took place and no reports of any checks undertaken at such visits have been provided.

As a non-executive director of GIGL, Mr Percival also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Percival failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL despite the issues that were occurring with Intermediary A’s failure to pay at the time of his consideration of the risk assessment prepared in October 2016.

The failures by Mr Percival outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Percival and as a result Mr Percival failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Aggravating Factors

The actions of Mr Younger and Mr Percival could have seriously put at risk the payment of claims to policyholders and therefore could have posed a risk to the reputation of the Bailiwick as an international finance centre.

Mitigating Factors

Mr Younger and Mr Percival accepted the findings against them and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalties imposed.

Global Insurance Group Limited, Christopher Schofield, Andrew William Robert

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Global Insurance Group Limited (“GIGL”)
Christopher Schofield (“Mr Schofield”)
Andrew William Robert (“Mr Robert”)

On 8 June 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £42,000 under section 11D of the Financial Services Commission Law on GIGL;

2. To impose a financial penalty of £17,500 under section 11D of the Financial Services Commission Law on Mr Schofield;

3. To impose a financial penalty of £10,500 under section 11D of the Financial Services Commission Law on Mr Robert; and

4. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that GIGL had materially contravened the Insurance Law and that GIGL, Mr Schofield and Mr Robert failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

GIGL is a Guernsey company incorporated on 21 December 2011. GIGL was licensed to conduct general insurance business by the Commission on 25 January 2012. GIGL provided medical health insurance products to expatriate individuals and companies employing expatriates around the world.

Mr Schofield has been a director of GIGL since 22 December 2011. Mr Robert was a director of GIGL from 21 December 2011 to 14 July 2017.

Under an agreement between GIGL and a United Kingdom intermediary (which had some common ownership with GIGL) (“Intermediary A”), Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the July 2017 Visit”). As a result of the July 2017 Visit, the Commission had concerns over GIGL’s oversight of functions outsourced to Intermediary A, in particular the management of the Claims Fund. The Commission also found that GIGL had not conducted any audit of the activity carried out by Intermediary A and could not adequately monitor the solvency of GIGL due to the frequency of reporting from Intermediary A.

Findings

GIGL

As a significant part of GIGL’s business was outsourced to Intermediary A and (as GIGL could outsource functions but not responsibility) it was an important function of GIGL to oversee the functions outsourced to Intermediary A, including that the reporting from Intermediary A was accurate.

Mr Schofield and Mr Robert confirmed to the Commission that no visits to Intermediary A were made for the purposes of checking the accuracy of the reporting to GIGL by Intermediary A prior to the July 2017 Visit. In addition, no documentation was provided to the Commission that showed that such checks were being undertaken. Mr Schofield and Mr Robert told the Commission that GIGL took the information provided by Intermediary A at face value and that GIGL relied on the GIGL directors who were also directors and/or shareholders of Intermediary A to raise issues.

As a result, GIGL failed to establish, and operate within, effective systems of risk management and internal controls and failure to retain at least the same degree of oversight of, and accountability for, any outsourced material activity or function (such as a control function) as applies to non-outsourced activity. Therefore GIGL breached (i) Principles A:10 and A:16 of the Code of Corporate Governance from 1 April 2016; and (ii) prior to 1 April 2016 paragraphs 2(h) and 3(b) of the Licensed Insurers Code of Corporate Governance. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law.

In the period prior to the July 2017 Visit, apart from the first quarterly payment to GIGL by Intermediary A, the only payments made were the exact amounts required to pay GIGL’s reinsurers. GIGL’s management accounts showed that the amounts outstanding from Intermediary A grew whilst GIGL’s cash remained low. The amounts due from Intermediary A were GIGL’s major asset.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party. This called into question the liquidity of GIGL’s major asset.

As a result, GIGL failed to maintain adequate liquidity or make adequate provision for depreciation or diminution in the value of its assets (including provision for bad or doubtful debts). Therefore, GIGL failed to fulfil the minimum criteria for licensing set out in paragraph 6(1) of Schedule 7 to the Insurance Law.

The amounts due from Intermediary A were deemed to have been outstanding for more than 90 days as at 30 April 2017 and 30 April 2018. This resulted in these amounts attracting a capital factor of 100% under the Insurance Business (Solvency) Rules, 2015 (“the Solvency Rules”) (i.e. in effect they are ignored as an asset in calculating whether GIGL complied with solvency requirements). As a result, as at 30 April 2017 and 30 April 2018 GIGL failed to hold regulatory capital resources greater than or equal to its Prescribed Capital Requirement in breach of paragraph 9 of the Solvency Rules. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law. In addition, GIGL failed at all times to maintain capital resources in accordance with rules of the Commission in breach of section 30(1) of the Insurance Law.

GIGL failed to deposit the annual return, accounts and audit report for the periods ending 30 April 2015, 30 April 2016, 30 April 2017 and 30 April 2018 within a period of four months beginning on the close of the financial year to which the accounts relate in breach of section 37(1) of the Insurance Law.

The significant amount of activity carried on by Intermediary A, the lack of oversight of this activity by GIGL and the lack of cash flow into GIGL brings into question whether there was any substance to the activity of GIGL within the Bailiwick.

Mr Schofield

As a director of GIGL, Mr Schofield failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Schofield also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Schofield prepared a risk register on behalf of GIGL in October 2016, which was subsequently considered by the board of GIGL. Credit risk, which was defined as financial loss through counterparty failing to meet obligations, was deemed to be low likelihood and medium impact by Mr Schofield.

Mr Schofield also prepared a risk assessment of outsourced activity in May 2018, which was again considered by the board of GIGL. Again, credit risk was deemed to be low likelihood and medium impact.

Given the issues that had been ongoing since November 2015 regarding the payments due from Intermediary A, that Intermediary A was GIGL’s largest debtor and that Mr Schofield subsequently told the Commission that the board had increasing concerns about the repatriation of funds during 2017 to 2018, this is surprising. As a result, Mr Schofield failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL.

The failures by Mr Schofield outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Schofield and as a result Mr Schofield failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Mr Robert

During his time as a director of GIGL, Mr Robert failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Robert also failed to ensure that the amounts due from Intermediary A were paid to the Licensee in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Robert failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL despite the issues that were occurring with Intermediary A’s failure to pay at the time of his consideration of the risk assessment prepared by Mr Schofield in October 2016.

The failures by Mr Robert outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Robert and as a result Mr Robert failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Aggravating Factors

GIGL had more than 2,000 policyholders around the world and the lack of adequate capital and liquidity could have seriously put at risk the payment of claims to these policyholders and therefore posed a risk to the reputation of the Bailiwick.

Mitigating Factors

Mr Robert made efforts to raise the issues during his time as a director (and subsequently). In addition, Mr Robert raised with the board of GIGL the fact that GIGL continued not to receive quarterly settlements despite the request to regularise payments in November 2015.

Mr Schofield made extensive efforts to rectify the breaches following the July 2017 Visit. This included recommending to the GIGL board in June 2018 that it cease underwriting new insurance business.

GIGL is no longer writing insurance business and has paid all known outstanding claims.

The Commission is not aware of any policyholders not being paid due to the lack of liquidity within GIGL.

GIGL, Mr Schofield and Mr Robert have been open and co-operative with the Commission since the issues were identified.

GIGL, Mr Schofield and Mr Robert accepted the findings against them and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalties imposed.

Criteria Wealth Management Limited, Mark Peter Penney, Marc Adam Roxby

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services  Commission Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”)  

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the  “IMII Law”)  

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)  

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick  of Guernsey) Law, 2000 (the “Fiduciaries Law”)  

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) (together the  “Regulatory Laws”) 

Criteria Wealth Management Limited (“CWM”) 

Mr Mark Peter Penney (“Mr Penney”) 

Mr Marc Adam Roxby (“Mr Roxby”) 

On 4 May 2020, the Guernsey Financial Services Commission (the “Commission”) decided: 

1. As a result of the company having been compulsorily wound up as at 31 January 2019, with no  funds available for distribution to unsecured creditors, to impose no penalty on CWM under section  11D of the Financial Services Commission Law; it should be noted that, but for the insolvent  liquidation of CWM, the Commission considered that a discretionary penalty of £50,000 on CWM  pursuant to section 11D of the FSC Law would have been appropriate (ceteris paribus);  

2. To impose a financial penalty of £40,000 under section 11D of the Financial Services Commission  Law on Mr Penney; 

3. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Penney from holding the position of director, controller, partner, manager, financial  advisor, general representative or authorised insurance representative for a period of 6 years;  

4. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Penney  for a period of 6 years; 

5. To impose a financial penalty of £20,000 under section 11D of the Financial Services Commission  Law on Mr Roxby; 

6. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Roxby, from holding the position of director, controller, partner or manager for a  period of 4 years; 

7. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Roxby  for a period of 4 years; and 

8. To make a public statement under section 11C of the Financial Services Commission Law. 

The Commission considered it reasonable, proportionate and necessary to make these decisions having  concluded that CWM, Mr Penney and Mr Roxby failed to fulfil the minimum criteria for licensing, and  in particular that Mr Penney was not a fit and proper person to hold the positions of director, controller,  partner, manager, financial adviser, general representative or authorised insurance representative and  Mr Roxby was not a fit and proper person to hold the positions of director, controller, partner or manager  under Schedule 4 to the POI Law and the IMII Law (and also were not fit and proper persons to hold  those respective positions in terms of Schedule 1 to the Fiduciaries Law, Schedule 7 to the Insurance  Law and Schedule 3 to the Banking Law, which set out the minimum criteria under these Laws). 

Background 

CWM is a Guernsey company, incorporated on 27 September 2012. CWM had six full time employees  until 2018, including three financial advisors, which included Mr Penney and Mr Roxby (from 25 February 2013 to 29 June 2018). Mr Penney was the Managing Director of CWM from incorporation  until 31 January 2019 and Mr Roxby was a director of CWM from 2 December 2014 to 15 June 2018.   

CWM was licensed under the POI Law and the IMII Law on 20 December 2012. CWM was licensed  under POI Law to carry on the restricted activities of Advice and Promotion in connection with  Category 1 Controlled Investments – Collective Investment Schemes.  CWM was not at any material  time licensed to carry out any restricted activity in relation to Category 2 Controlled Investments -  General securities and derivatives.  CWM was licensed under the IMII Law as an insurance  intermediary, to advise on and arrange long-term life insurance, savings products and single premium  business.   

The Commission conducted an on-site thematic visit at CWM in October 2013 (“the 2013 Visit”).   Following the 2013 Visit, CWM wrote to the Commission outlining improvements in CWMs processes  and procedures.  The Commission wrote to CWM again in July 2015 warning CWM against switching  clients without proper consideration of rebalancing risks within existing products and had set out the  Commission’s expectation that exit penalties, investment timeframes, adviser remuneration and product  provider charges should form part of the assessment underlying any recommendation. The Commission  conducted a further on-site visit of CWM in April 2016 (“the 2016 Visit”). The purpose of this visit  was to ascertain compliance with the Commission’s letter of July 2015.  The Commission found issues  including lack of evidence that recommended surrender/withdrawal was in clients’ best interests;  ineffective peer review of Advice provided to clients; and acting outside the terms of CWM’s licence  by performing the restricted activity of Management. Whilst CWM disagreed with the Commission’s  findings from the 2016 Visit, CWM committed to implement a Risk Mitigation Plan.  

In May 2017, a complaint was made to the Commission by a licensed entity - on behalf of its client,  and CWM’s former client, Client X.  Client X was an elderly client and CWM’s largest client from  December 2013 onwards until the end of the client relationship.  The licensee also provided the  Commission with copies of documents provided by CWM to Client X.  These documents disclosed a  sale of CWM’s own shares to Client X by Mr Penney.  The documents also identified advice provided  to Client X relating to the surrender of long-term insurance bonds.  The pattern of advice evidenced in  the Client X file raised concerns of widespread similar practice of unsuitable advice and led to the  Commission reviewing a sample of other client files to determine if the pattern of unsuitable advice was  more widespread.  

Following consideration of the investment advice in the client files, the Commission noted that CWM  was advising on and promoting Structured Notes, which the Commission believed were Category 2  Controlled Investments.  CWM was not licensed to advise on and promote Category 2 Controlled  Investments.   

Mr Roxby resigned from CWM with effect from 16 June 2018. Mr Penney and a Non-Executive  Director sought a purchaser for CWM’s book of business, but ultimately this search was not successful.  An order for the compulsory winding up of CWM was obtained dated 31 January 2019. The  Commission accepted surrender of CWM’s licences under the POI Law and the IMII Law on 28  February 2019.  

Findings 

CWM’s Sale of Structured Notes 

CWM was licensed under the POI Law to carry on the restricted activities of “Advice” and “Promotion”  in connection with Category 1 Controlled Investments – Collective Investment Schemes.  It is not  disputed by CWM, Mr Penney or by Mr Roxby that CWM was not licensed at any time to carry out  any restricted activity in relation to Category 2 Controlled Investments – General Securities and  Derivatives.   

The Structured Notes advised on and promoted by CWM are contracts that fall within the classification  of Category 2 Controlled Investments under Schedule 1 of the POI Law by reason of the investments  comprising derivatives.  Some of the Structured Note fact sheets seen by the Commission state that the  product is a derivative instrument. 

The Structured Notes that CWM was promoting to and recommending to its clients were typically  structured products comprising a bond plus a derivative instrument or instruments (typically linked to  the value of one or more equities). CWM engaged in the Restricted Activities of Promotion and Advice  in relation to the Structured Notes.  CWM was not licensed to promote or advise on Category 2  Controlled Investments and therefore in promoting and/or advising on Structured Notes, CWM was  conducting unlicensed business. 

Mr Penney and Mr Roxby’s position in response to the Commission was that the categorisation of the  Structured Notes was a “grey area” and they believed that the Structured Notes did not fall within  Category 2 Controlled Investments.  

The question of whether the licence of a business extends to cover the business being conducted is so  fundamental, and the consequences of conducting unlicensed business are so serious, that the CWM  Directors ought to have taken legal/expert advice on what they considered at the time to be a “grey  area” to resolve the issue before starting to sell Structured Notes to their clients. It was not disputed that  no such advice was taken at that time.  

The consequences of conducting unlicensed business in Structured Notes  

The Structured Notes comprised a significant part of CWM’s business.  In the period 11 March 2014 to  26 April 2018, Mr Roxby advised CWM’s clients to invest a total of £2,865,000 in 148 Structured  Notes.  In the same period, Mr Penney advised CWM’s clients to invest a total of £745,000 in Structured  Notes. The consequences of CWM conducting unlicensed business in relation to Structured Notes, and  of Mr Penney and Mr Roxby collectively failing to prevent CWM undertaking controlled investment  business for which it was not licenced, have been, predictably, serious in that – 

• CWM has contravened section 1(1) of the POI Law in relation to advice, promotion and sales of  Structured Notes to its clients over the years 2014 - 2018; 

• CWM’s professional indemnity insurers have to date refused to provide indemnity in relation to  advice, promotion and sales of Structured Notes by CWM, because it was unlicensed business and  thus clients of CWM, Mr Penney and Mr Roxby have been exposed to, and in some cases have  suffered, uninsured losses (although there may be recourse through an award by the Channel  Islands Ombudsman in respect of a small number of complainants and professional indemnity  insurance may respond in respect of these albeit no awards nor confirmation of the insurance  position have been confirmed to date); and 

• CWM has been exposed to reputational risk, legal risk and regulatory risks. 

As at 31 December 2018, CWM had received requests for compensation in relation to the Structured  Notes in the sum of £79,000 and had settled one complaint in the sum of £4,000 compensation.  

The contraventions and the conduct by CWM, of unlicensed business, is evidence of a failure on the  part of CWM to fulfil the Minimum Criteria for Licencing under Schedule 4 of the POI Law in the  following respects: 

• Paragraph 1(2)(b)(i), ‘contravened any provision contained in or made under this Law’; and 

• Paragraphs 2(1)(b) and (c) which state the ‘business of the applicant or licensee… will be carried  on’, ‘with professional skill appropriate to the nature of the activities’ and ‘in a manner which will  not tend to bring the Bailiwick into disrepute as an international finance centre’.  

Both Mr Penney and Mr Roxby failed to fulfil the Minimum Criteria for Licencing under Schedule 4  of the POI Law in the following respects:  

• Paragraph 1(1)(a), ‘competence’ and ‘soundness of judgement’ by giving advice to clients  recommending Structured Notes, which comprised Category 2 Controlled Investment Business for which CWM was not licensed and failing to obtain proper advice about the controlled investment  status of the Structured Notes;  

• Paragraph 1(1)(c), jeopardising the ‘reputation of the Bailiwick as a reputable finance centre’,  evidenced by investor complaints resulting from CWM’s Category 2 Controlled Investment  Advice;  

• Paragraph 1(1)(e), ‘knowledge and understanding of the legal and professional obligations to be  assumed or undertaken’ in terms of the failure to realise their recommended Structured Notes  investments as Category 2 Controlled Investments under the POI Law;  

• Paragraph 1(1)(g), ‘policies, procedures and controls to comply with any rules, codes, guidance,  principles and instructions’ by the failure of CWM’s investment policy and committee to correctly  identify that CWM’s licence did not include advice or promotion of Category 2 Controlled  Investments under the POI Law and under the POI Law; and 

• Paragraph 2(b) “contravened any provision contained in or made under – this Law …or the  regulatory laws”. 

Whether CWM provided suitable Advice and Information to its clients about Structured Notes 

The Structured Notes were complex and high risk investments and each of the financial advisors  promoting and recommending these products to clients (had this been licenced business of CWM which  as set out above, it was not) ought not to have done so, without a proper understanding of the risks and  the disadvantages of investing in these products, and without communicating those risks to the clients.  Over the period 2014 to 2016, CWM, Mr Penney and Mr Roxby wrongly categorised the Structured  Notes as low risk when they were high risk and this led to unsuitable recommendations being made to  many of their retail clients, who had low risk appetites, to purchase Structured Notes.  This was a breach  of Rule 5.2.2(c)(i)  of the Licensees (Conduct of Business) Rules, 2009, 2014 and 2016 (“the Licensee  Rules”).  Clients were therefore not made aware of the true nature of the risks of the Structured Notes,  in particular the risks of capital loss up to 100% of capital invested, which is a breach of Rule 5.2.3(d)  of the Licensee Rules.   

Further, CWM did not provide a clear statement of prior disclosure in relation to all remuneration that  it was to receive for the Structured Notes transactions, indeed it made statements that failed to disclose  the distribution fees paid to CWM on the Structured Notes which could be as high as 8% of the capital  invested.  This was a breach of Rule 5.2.4 of the Licensee Rules. This comprised a breach of Rule  5.2.3(a) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm to provide prior  disclosure to its client of “the basis or amount of its charges” for the provision of services and a breach  of Rule 5.2.3(d) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm not to  recommend a transaction to a client unless it had taken “reasonable steps to make him aware of the risks  involved including conflicts of interest” and a breach of Principle 5.  From 1 January 2015, this also  comprised a breach of Rule 5.2.4(b) of The Licensees (Conduct of Business Rules) 2014 and 2016  which requires the Firm to provide prior disclosure of all charges/remuneration to be received in  connection with each associated transaction and again a breach of Principle 5 as set out above.  

CWM’s Financial Advisors, including Mr Penney and Mr Roxby, were required only to provide advice  on matters upon which they were competent and qualified to advise.  CWM’s Board failed to ensure  that each of its financial advisers held such qualifications to at least the minimum standard as published  by the Commission. CWM’s Advisors did not have qualifications meeting the Commission’s published  minimum requirements relating to Category 2 Controlled Investments when they should have both had  the requisite qualifications no later than 31 March 2016.  This was a breach of Rule 3.5.3(e) of the  Licensee Rules. 

The contraventions set out above represent a failure by CWM to fulfil the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(b) ‘act in accordance with’ the Principles of Conduct  of Finance Business (“the Principles”); and in terms of the IMII Law Schedule 4, Paragraph 1(1)(b)  ‘with professional skill appropriate to the nature and scale of his activities’ and 1(2)(a)(i) ‘act in accordance with’ the Principles.  

Mr Penney failed to ensure CWM adhered to Principle 2 of the Principles.  In this regard Mr Penney  failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and  IMII Law in terms of: 

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, “competence” and  “soundness of judgement” in relation to unsuitable Advice provided to CWM’s clients  recommended Structured Notes; and  

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Penney.  

Mr Roxby also provided unsuitable Advice to CWM’s clients, recommending Structured Notes  investments. Mr Roxby failed to ensure CWM adhered to Principle 2 of the Principles.  Mr Roxby  therefore failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI  Law and the IMII Law in terms of: 

• Paragraph 1(1)(a) and Paragraph 3(2)(a) of IMII Law, “competence” and “soundness of  judgement” in relation to his unsuitable Structured Note Advice to CWM’s clients; and  

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Roxby.  

CWM’s Advice to and Dealings with Client X 

Whether CWM provided suitable advice to Client X 

Mr Penney  

Client X was at the relevant time an elderly retail client with some knowledge of financial transactions  but no professional expertise. Mr Penney advised Client X to surrender two insurance bonds in  February/March 2014.  Mr Penney advised Client X to reinvest the proceeds of one bond (“the larger  insurance bond”) into three similar bonds from the same provider in order to provide for Client X’s  heirs.  Mr Penney advised Client X to reinvest the proceeds of the second bond (“the smaller insurance  bond”) into a discretionary managed portfolio.  This advice was unsuitable.   

In particular: 

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.  File notes made by Mr Penney and the recommendation letters were  inconsistent with regard to investment objectives and risk tolerance. Mr Penney would record  his advice in these documents as if the idea for the advice or strategy had come from Client X,  when in fact it had been Mr Penney’s advice or suggested strategy.  This was seen throughout  the documentation and was disingenuous at best, and, at worst, thoroughly misleading. 

2. Mr Penney provided unsuitable advice and, in some cases, misleading advice (including tax  advice on which he was not qualified to advise) to Client X, in relation to the larger insurance  bond.  Mr Penney failed to establish that the transaction he recommended in relation to the  larger insurance bond was in Client X’s best interests. 

3. Mr Penny also gave misleading advice about the tax liabilities that Client X had “accrued”,  giving the impression, as recorded in his recommendation letters and his file notes of  conversations with Client X, that they had somehow accrued a tax bill of nearly £600,000. He  later made admissions to the Commission that the tax had not in fact accrued (and was not in  fact payable at the time and would not be payable at all by Client X’s heirs on the demise of  Client X) and further that the maximum tax payable by a Guernsey resident was £220,000 in  any one year.  Despite these facts, Mr Penney repeatedly gave the impression to Client X that  his suggested restructure of the insurance bonds would save Client X’s tax liabilities and allow  Client X “to take advantage” of the tax cap of £220,000 when the truth was that the tax cap was  always available. 

4. Mr Penney should not have recommended this complex and difficult transaction without  independent expert tax advice which Client X should have received in writing and which  stipulated that the transaction was in their best interests.  Without this, it was impossible for Mr  Penney to reconcile his conflict of interest – CWM would earn no trail fees on the existing  insurance bonds (ie. if the original structure was left in place) but would only earn initial, and  trail fees, on new or restructured products. This was not disclosed to Client X, and the conflict  of interest neither disclosed nor managed.  

5. In relation to the smaller insurance bond, which had no tax issues, Mr Penney’s  recommendation was to encash this bond in its entirety and invest in a discretionary managed  portfolio – thus paying new on-boarding fees (and generating initial and trail fees for CWM  which would otherwise not have been available to CWM had the initial structure remained in  place). Mr Penney failed to establish that the transaction he recommended in relation to the  smaller insurance bond was in Client X’s best interests. 

6. Mr Penney failed to advise Client X about alternative restructures or investments that might be  more cost effective and tax efficient solutions for them.   

7. Mr Penney failed to disclose remuneration to be earned by CWM on products sold to Client X,  and recommendation letters were in some cases misleading in implying that CWM would not  earn commissions or fees on particular products sold to Client X, when they would in fact do  so; and 

8. Mr Penney made internal file notes, which purported to be contemporaneous records of advice  given to Client X and of conversations held with Client X.  These were in fact so confusing and  internally contradictory that they could not be relied upon as contemporaneous evidence unless  also corroborated by external evidence; Mr Penney had in fact drafted several file notes relating  to Client X during 2017 in response to a request for more information from his compliance  officer, but had backdated these file notes to give the appearance that they were  contemporaneous notes recording advice given to Client X in 2014.  

During the period 2014 to 2016, Mr Penney gave additional unsuitable advice to Client X in relation to  Structured Notes and other investments.  In particular: 

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.  

2. Mr Penney provided unsuitable advice to Client X and failed to give proper risk warnings in  relation to the Structured Notes and other investments over the period 2014-2017, in that the  Structured Notes were proposed as low risk when they were in fact high risk and warnings  given about the risk of capital losses were either absent or insufficient; and 

3. Mr Penney failed to disclose, sufficiently or at all, the remuneration to be earned by CWM on  products sold to Client X, and recommendation letters were in some cases misleading in  implying that CWM would not earn commissions or fees on particular products sold to Client  X, when they would in fact do so. 

Overall, the advice provided to Client X by Mr Penney was neither suitable nor provided by CWM’s  Advisor with “integrity”, nor with “due skill, care and diligence towards its customers”; and conflicts  of interest were not managed, in contravention of Principle 1, 2 and 3 of the Principles. In this regard  Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the  POI Law and the IMII Law in terms of fit and proper person considerations:  

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law, “probity”, “competence”  and “soundness of judgement” in relation to unsuitable advice provided to Client X; and 

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in advice provided to Client X written by  Mr Penney. 

Mr Roxby 

During the period 2014-2017, Mr Roxby was in all cases the Advisor tasked with the responsibility for  reviewing and checking Mr Penney’s advice to Client X. Mr Roxby was supposed to provide “four  eyes” review for each piece of advice Client X received as CWM’s authorised Financial Advisor (and  also as a Director, from December 2014).

There was no evidence of Mr Roxby providing any effective check or challenge to Mr Penney – he  simply signed off Mr Penney’s advice, even when there were obviously questions to be asked about the  tax position and the suitability of the advice being provided. Mr Roxby abdicated responsibility and  endorsed all of the advice given by Mr Penney, thus providing no check or challenge to Mr Penney, and  therefore did not perform his allotted function within CWM. 

Mr Roxby, by his failures in lack of care and diligence when peer reviewing Mr Penney’s advice to  Client X and his failures to challenge, correct or prevent the provision of unsuitable advice to Client X  thereby failed to adhere to Principle 1, 2 and 3 of the Principles.  Mr Roxby therefore failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:  

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law “competence” and  “soundness of judgement” in relation to his failure properly to peer review and his tacit approval  of advice given by Mr Penney to Client X on behalf of CWM which was unsuitable advice; and 

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assume or undertaken’, demonstrated  by his failure properly to peer review and tacit approval of Mr Penney’s unsuitable advice to Client  X. 

The failures to fulfil the Minimum Criteria for Licensing by Mr Penney and Mr Roxby contributed to a  failure by CWM to meet the Minimum Criteria for Licensing in terms of the POI Law Schedule 4,  Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and  2(2)(a) ‘act in accordance with’, the Principles. Under similar provisions in the IMII Law Schedule 4  Paragraph 2(1)(b) and 1(2)(a)(ii) the behaviours of Mr Penney and Mr Roxby also contributed to CWM  Firm failing to meet the Minimum Criteria for Licencing. 

Conflicts of interest in relation to the private sale of CWM shares by Mr Penney to Client X in  January and July 2016 

Client X acquired 5% of CWM’s shares from Mr Penney for £65,000 in January 2016.  Client X paid  the £65,000 purchase monies into Mr Penney’s personal bank account.  Mr Penney personally retained  £60,000 of the £65,000 in relation to this transaction while the balance was paid to CWM.   

The updated share register was ratified at a CWM board meeting on 28 January 2016, at which Mr  Roxby was present.  This was the only reference in the minutes to the first share sale transaction between  Mr Penney and Client X. Mr Penney did not declare any conflict of interest at the board meeting in  relation to the sale of shares to Client X. 

In July 2016, Mr Penney emailed the CWM directors, including Mr Roxby, stating that Client X wished  to increase their shareholding in CWM to 10% and that he had agreed in principle to sell Client X  a  further 5% of his own shares in CWM.  Mr Penney asked for confirmation from the other directors  whether they had any objections.  Mr Roxby confirmed he had no objections.   

Client X purchased a further 5% shareholding in CWM from Mr Penney in July 2016 for £65,000.  As  with the first share sale transaction, the £65,000 was transferred by Client X to Mr Penney’s personal  bank account.  None of the £65,000 was loaned to CWM by Mr Penney.  He retained the entire sum for his personal benefit. 

Mr Penney and another director had signed off the company accounts on 20 June 2016 which showed  that, for the prior financial year, CWM was trading at a loss.  It was unlikely, therefore, that any dividend  would be paid by the end of the year, contrary to what Mr Penney had stated twice to Client X. 

Client X was at all times categorised by Mr Penney himself as a “lower risk” or “medium risk” retail  investor, and not at any stage a high risk investor.  The letters of 2 January and 19 July 2016 from Mr  Penny to Client X describing the share sale transactions are wholly inadequate in bringing to their  attention all the matters that Client X, and/or any independent financial/legal advisor, needed to know  about the transaction.   

Mr Penney ought to have set out in writing and in clear terms, at minimum, the following information:  (i) Mr Penney was acting in his personal capacity in the transaction and was not acting as Client X’s  financial advisor; (ii) Client X should take independent legal and/or financial advice on this transaction;  (iii) CWM would not receive the funds. The share purchase monies were for Mr Penney’s private  account and that he would personally profit from the sale; (iv) Mr Penney had not undertaken an  independent share valuation and Client X should have the shares valued independently; (v) CWM was  presently loss making, and there were no plans to declare a dividend during 2016; (vi) an audited set of  the latest accounts to be enclosed which should be shown to the independent advisor/s and (vii) a clear  risk warning to the effect that the purchase of the shares was a high risk investment, which could result  in 100% loss of capital since these shares were illiquid investments in a private company which was  presently loss making.  If Client X had appointed an independent legal/financial advisor, then Mr  Penney ought to have requested a signed letter from her independent advisor stating such advice had  been given before the transaction could proceed. 

Mr Penney did not act in an open and transparent manner in relation to the share sales to Client X. In  relation to both share purchase transactions, it was a situation where the onus lay on Mr Penney to give  Client X full disclosure of his conflict of interest and also of all the risks involved in the transaction and  there is no evidence that he did so. Instead, Mr Penney, even at interview, appeared to consider it was  sufficient to give Client X the opportunity to take independent legal advice.  But, to Mr Penney’s  knowledge, Client X did not take independent legal or financial advice on the transactions, and nor did  they have the full disclosure needed from Mr Penney to make an informed decision on the risks of the  transactions. In those circumstances, Mr Penney ought not to have proceeded with the transactions given  the glaring conflict of interest he faced, being both financial advisor to Client X and beneficiary,  personally, of the proceeds of the transactions. 

Client X was significantly disadvantaged by both transactions. They transferred cash/medium risk  assets into very high risk illiquid shares in a private, loss making company with no security and a high  prospect of substantial or total capital loss.  Client X did indeed lose the entire capital invested in the  shares in the sum of £130,000.  

Mr Penney could not establish that the price paid by Client X was a fair price for the shares for the  following reasons: (i) Mr Penney did not himself obtain an independent valuation of the shares; (ii) Mr  Penney’s calculation of the price of the shares was subjective, informal, undocumented and based on  assumptions as to future fees and earnings for CWM that were not reconciled with existing management  or audited accounts; on a market valuation method, the transaction for the purchase of 50 shares in  CWM from another shareholder in January 2016 was the closest and most relevant comparator but Mr  Penney had paid £500 per share to that shareholder in January 2016 and yet Mr Penney charged Client  X £1,300 per share per share for the January and July 2016 share sale transactions which raises a serious  question as to whether Mr Penney was charging Client X a fair price for the shares; and on a multiples  method of valuation, there was no contemporaneous documentation (ie, at the time of the share sales  transaction) or independent valuation advice to support the valuation Mr Penney arrived at.  

The sale of CWM’s shares by Mr Penney to Client X in January and July 2016 demonstrates the failure of CWM and its Directors to identify, mitigate and manage the serious conflict of interest. The fact that  Mr Penney sold CWM’s shares to Client X at a price he cannot establish on the evidence as fair, and  that he personally profited from the sale proceeds without full disclosure to Client X (and/or insisting  that they took independent advice) was improper and aggravates the breaches on the part of Mr Penney.   This demonstrated a lack of personal probity by Mr Penney.  Together these matters demonstrate that  Mr Penney acted with a lack of probity, competence and soundness of judgement, and evidence his  failure to fulfil the Minimum Criteria for Licencing under the Regulatory Laws. 

CWM had an opportunity to prevent Mr Penney selling CWM’s shares to Client X when Mr Penney  discussed the January share sale in advance with Mr Roxby. Mr Roxby and Mr Penney did not tell  CWM’s other director about the January 2016 sale.  The consequence of Mr Penney’s and Mr Roxby’s  failures meant the conflict of interest was neither identified nor managed adequately by CWM. 

By his lack of care and diligence, and failures to avoid and manage conflicts of interest, Mr Penney  failed to ensure CWM adhered to the Principles 1, 2 and 3.  Mr Penney failed to fulfil the Minimum  Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person  considerations:  

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘probity’, ‘competence’  and ‘soundness of judgement’ in relation to the sale of his shares in CWM to Client X; 

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the private share sale to Client X despite the conflict of interests; and 

• Paragraph 2(c)(i) of the POI Law and Paragraph 3(3)(c)(i) of the IMII Law ‘engaged in a business practice’ that ‘appears to the Commission to be deceitful or oppressive or otherwise improper’. 

Mr Roxby, by his lack of care and diligence, and failures to prevent and manage conflicts of interest,  failed to ensure CWM adhered to Principles 1, 2 and 3 of the Principles.  Mr Roxby failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:  

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘competence’ and  ‘soundness of judgement’ in relation to his failure to raise questions and concerns in relation to the  sale of CWM’s shares to Client X; and 

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by his lack of challenge to, and tacit approval of, the private share sale to Client X  and the resultant unmitigated conflict of interest.  Mr Roxby did not think to intervene in the share  sale transactions, despite the fact that Mr Roxby had overseen the recommendation letters and  correspondence between Mr Penney and Client X for two years in his role as peer reviewer, and  therefore understood how Mr Penney was a trusted advisor to Client X. 

The contraventions set out above demonstrate CWM’s failure in terms of Principles 1, 2 and 3.  These  breaches also represent a failure by CWM to meet the Minimum Criteria for Licensing in terms of the  POI Law, Schedule 4 paragraph 1(1)(g) and the IMII Law, Schedule 4 paragraph 3(2)(g), ‘policies  procedures and controls to comply with any rules, codes, guidance, principles and instructions’. 

CWM’s Records were insufficient in many cases to show the provision of suitable advice to other  clients 

Analysis of CWM’s investment surrender log and some sample examples of written advice provided to  clients other than Client X demonstrated patterns of switching, underpinned by generic reasoning that  failed to document sufficiently, or at all, in the following three areas: (i) the reasons for the  recommended investment switches; and/or (ii) the costs savings or other advantages that would accrue  to the client from the switching; and/or (iii) the costs of the proposed new investments. 

The repeated similar justifications for product surrender and reinvestment in 2016 and further repeated  wording in 2017 suggest that the recommendations to clients were not sufficiently personalised but that  CWM’s financial advisors adopted formulaic or generic standard templates. The advisors to the clients  included Mr Penney and Mr Roxby.  CWM by its advisors frequently did not fully document to the  clients how much the alleged “cost savings” added up to, and how those cost savings justified the  recommendation to switch.  CWM and its advisors, including Mr Penney and Mr Roxby, ought to have  documented this clearly and set out a comparison between the costs under the existing investment and  the costs under the recommended new investment in order to assist clients to decide whether to accept  his recommendations.  CWM’s records were therefore in several cases, in addition to Client X,  insufficient to demonstrate and fully document that the surrender was in the clients’ best interests. 

Finally, to the extent that any of the CWM clients were recommended Structured Notes, the same issues  arose in relation to a failure on the part of CWM, and its Advisors, to warn of the significant risks of  loss of capital, a failure to document the high risk rating for Structured Notes, and a failure to establish  suitability, and/or to document appropriately why these recommendations were in the best interests of each client. 

The contraventions outlined above demonstrate CWM’s failure to adhere to Principle 2, ‘A licensee  should act with due skill, care and diligence towards its customers and counterparties.  

The breaches also constitute a failure by CWM to fulfil the Minimum Criteria for Licencing in terms of  the POI Law, Paragraph 1(1)(b) ‘diligence’ and Paragraph 1(1)(g) ‘polices procedures and controls to  comply with any rules, codes, guidance, principles and instructions’. In addition, the same  contraventions represent similar failures under the IMII Law to fulfil the Minimum Criteria for  Licencing with particular regard to, Paragraph 1(1)(b) ‘professional skill appropriate to the nature and  scale of his activities’ and Paragraph 2(a) ‘act in accordance with’,  ‘(i) the Principles of Conduct of  Finance Business’ and ‘(ii) any rules, codes, guidance, principles and instructions issued from time to  time under this law’. 

By their failures to observe high standards of integrity and act with due skill, care and diligence in relation to the matters set out above, Mr Penney and Mr Roxby (until July 2015), failed to ensure CWM  adhered to the Licensee Rules, the Code of Conduct for Authorised Insurance Representatives (until 31  December 2014), the Code of Conduct for Financial Advisors (from 1 January 2015), and Principle 2  of the Principles.  Therefore, CWM failed to fulfil the requirement of the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(a) ‘act in accordance with’ the Principles. Under  similar provisions in the IMII Law Schedule 4 Paragraphs 1(1)(b) and 1(2)(a)(i) CWM also failed to  fulfil the Minimum Criteria for Licencing. 

Aggravating Factors 

Other than the complaint from Client X and the complaints of Structured Notes holders, none of the  matters comprising breaches set out above were brought to the attention of the Commission. 

In relation to the advice given by CWM, Mr Penney and Mr Roxby and the failures to document reasons  for recommendations and failures to disclose remuneration, CWM has a poor regulatory history as far  back as the first Commission visit in 2013, and again highlighted by the Commission’s visit of 2016.   

The failure to take legal advice in relation to the nature of the Structured Notes and the consequent  conduct of unlicensed business in selling approximately 200 Structured Notes to clients has resulted, in  some cases, in uninsured losses for clients. 

Mr Penney’s advice to Client X, an elderly client, resulted in a significant tax bill for Client X, as well as significant commission income for CWM.  The commission from restructuring Client X’s insurance bonds generated 15-20% of CWM’s income for 2014. 

In relation to the share sales to Client X, Mr Penney engaged in very deliberate improper conduct,  profiting to the sum of over £100,000. 

Mr Roxby failed to provide any check or challenge to Mr Penney in relation to the failures relating to Client X and this meant that he provided no protection to Client X in relation to very serious failures and contraventions by CWM and Mr Penney. 

Mitigating Factors 

CWM appointed a third party consultant to assist with remediation following the 2016 Visit.  Thereafter,  CWM completed a remediation plan to the satisfaction of the Commission.  The remediation improved  CWM’s compliance with regulatory requirements.   

In relation to the conflicts of interest regarding the sale of shares to Client X, Mr Penney and Mr Roxby  admitted during the Investigation that the conflicts of interest policies at CWM were inadequate and  that they did not manage the conflicts of interest as they were obliged to.  CWM subsequently revised  its conflicts of interest policy and amended its articles to prevent the sale of shares to its clients. 

Mr Roxby did not make any personal gain from the sale of shares to Client X.   

Following the Commission’s letter of July 2015, Mr Roxby appears to have taken into account the  Commission’s comments in his advice to clients. 

CWM, Mr Penney and Mr Roxby co-operated with the investigation.

Louvre Fund Services Limited, Kevin Gilligan, Charles Peter Gervais Tracy, Derek Paul Baudains, Julian Dai Lane

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (“the Financial Services Commission Law”); 

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”); 

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”); 

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the “IMII Law”); 

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) and

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Business Law”) (together “the Regulatory Laws”). 

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended (“the Regulations”); 

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (“the Handbook”); 

The Principles of Conduct of Finance Business (the “Principles”); 

The Licensees (Conduct of Business) Rules 2009, 2014, 2015 and 2016 (the “COB Rules”);  

The Registered Collective Investment Scheme Rules 2008, 2015 and 2018 (the “RCIS Rules”); 

The Principles of the Code of Corporate Governance 2011, 2014 and 2016 (the “Code of Corporate Governance”); 

The Code of Practice – Corporate Service Providers 2009 (the “CSP Code”); and 

The Code of Practice – Company Directors 2009 (the “Directors Code”) (together “the Regulatory Requirements”).  

Louvre Fund Services Limited, (the “Licensee” or the “Firm”) 

Mr Kevin Gilligan (“Mr Gilligan”) 

Mr Charles Peter Gervais Tracy (“Mr Tracy”) 

Mr Derek Paul Baudains (“Mr Baudains”) 

Mr Julian Dai Lane (“Mr Lane”)   (together “the Directors”) 

On 17 February 2020, the Guernsey Financial Services Commission (“the Commission”) decided: 

• To impose a financial penalty of £77,000 under section 11D of the Financial Services Commission Law on the Licensee;  

• To impose a financial penalty of £52,500 under section 11D of the Financial Services Commission Law on Mr Gilligan; 

• To impose a financial penalty of £31,500 under section 11D of the Financial Services Commission Law on Mr Tracy;  

• To impose a financial penalty of £28,000 under section 11D of the Financial Services Commission Law on Mr Baudains;  

• To impose a financial penalty of £14,000 under section 11D of the Financial Services Commission Law on Mr Lane; 

• To make orders under the Regulatory Laws prohibiting Mr Gilligan from performing the functions of director, controller, partner or manager of a regulated entity under any of the  Regulatory Laws for a period of 6 years and 2 months from the date of this public  statement; 

• To make orders under the Regulatory Laws prohibiting Mr Tracy from performing the  functions of director, controller, partner or manager of a regulated entity under any of the  Regulatory Laws for a period of 3 years and 6 months from the date of this public  statement; 

• To disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of  Mr Gilligan and Mr Tracy for periods of 6 years and 2 months; and 3 years and 6 months  respectively from the date of this public statement; and 

• To make this public statement under section 11C of the Financial Services Commission Law. 

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee and the Directors had failed to ensure compliance with the Regulatory Requirements, and the minimum criteria for licensing set out in Schedule 1 of the Fiduciaries Law and Schedule 4 of the POI Law. 

BACKGROUND 

In 2000, the Licensee was established in Guernsey and holds licenses for Category 1 and Category 2 controlled investments prescribed under the POI Law; and undertakes fiduciary activities under a full fiduciary license.  

The Licensee’s primary regulated activity is the establishment and administration of investment funds.  The Licensee would, as part of their administration services provide, on occasions, directors of the Licensee to sit on the boards of specific Funds / Companies or their Investment Advisers.  

Mr Gilligan has been a director of the Licensee since August 2008 and Managing Director since January 2011.   

Mr Tracy was a director and the compliance officer of the Licensee between August 2003 and December 2016. 

Mr Baudains has been a director of the Licensee since July 2000. 

Mr Lane has been a director of the Licensee since October 2011 and was the MLRO between February 2012 and March 2017. 

The Commission’s investigation into the Licensee commenced in 2017; and as part of this investigation, Oben Regulatory Limited was appointed as inspectors. 

FINDINGS 

The Commission’s investigation found: 

The Licensee failed to administer certain funds in accordance with the Principal Documents and Information Particulars 

The Licensee administered a Registered Collective Investment Scheme, involving assets (natural resources) that were not familiar to them, and which were located outside of the Bailiwick (“Scheme A”).  

The Commission expects a Licensee performing the function of designated administrator to operate such a scheme in accordance with The Registered Collective Investment Scheme Rules 2008, 2015 and 2018 (the “RCIS Rules”).   

Rule 3.01(1) of the RCIS Rules requires a designated administrator to administer the scheme in accordance with the Principal Documents and the most recently published Information Particulars. 

On a wider basis, the Commission expects a Licensee to understand and comply with its contractual and other legal obligations, as required under Principle 6 of the Code of Corporate Governance; and the Directors to operate in accordance with all relevant legislation, as required under Principle 2.1 of the Code of Corporate Governance. 

Example 1 

Mr Gilligan and Mr Tracy were directors on the board of Scheme A. Mr Gilligan was appointed on 7 October 2010 and Mr Tracy on 22 May 2013. 

The Commission expected that these appointments should have enabled the Licensee to gain a greater oversight of the scheme it was administering.  However, the Commission noted during its investigation that neither the Licensee, nor Mr Gilligan, nor Mr Tracy were able to demonstrate: 

• Satisfactory documentary proof of ownership for the assets of the scheme;

• The exact location of all of these assets; or

• Satisfactory documentary proof of the exact number of assets acquired. 

The Commission determined that the information gaps mentioned above resulted from the fact that reports from the investment adviser were predominantly verbal and often lacking in granular detail; and as such, the flow of information necessary to properly administer the scheme was insufficient. 

Therefore, the Licensee was unable to consistently value the assets in accordance with the Principal Documents and Information Particulars. 

Example 2 

The Licensee also administered an Authorised Collective Investment Scheme, of which one of its cells held assets that were not familiar to them (“Scheme B”).  These assets were natural resources of high-value, the specialist trade in which requires careful scrutiny, in particular, regarding the provenance of assets. 

Mr Gilligan was a director of the investment manager of Scheme B from 4 March 2014 to 5 January 2017 (inclusive), and Mr Tracy and Mr Baudains were directors on the board of Scheme B, in Mr Tracy's case from 14 March 2014 to 19 October 2016 (inclusive); and in Mr Baudains' case from 14 March 2014 to 14 December 2016 (inclusive). 

The Commission’s investigation identified serious compliance failings in respect of Scheme B, and these are described in more detail below.  However, in the context of acting in accordance with Principal Documents, the Commission noted that despite the requirement for enhanced vigilance to be undertaken in this case, neither the Licensee, nor the appointed Directors were ever able to fully establish the provenance of these high-value assets. 

The inability to satisfy the provenance of the assets constituted a breach of the Principal Documents. 

The Licensee failed to abide, at times, with contractual and legal obligations 

The Commission expects Licensees to abide by Principle 6 of the Code of Corporate Governance, which requires a Licensee to (i) understand and comply with its contractual and other legal obligations; and (ii) keep and preserve appropriate records, including accounting records. 

Example 1 

The Licensee administered two companies (“Company C” and “Company D”) whose purpose was to generate income through the acquisition of natural products in a number of foreign countries for onward sale, funded by the issue of loan notes listed on a recognised stock exchange. 

Mr Gilligan and Mr Tracy were appointed to the board of directors of both Company C and Company D in January 2013.  

The Licensee was obligated under an administration agreement to oversee the payment of funds raised through the issuance of loan notes, via Companies C and D, to specified overseas companies, who would then acquire assets on their (Company C and Company D) behalf. 

However, the Licensee on three occasions authorised the payments of funds to an overseas company, which had no contractual obligations with either Company C or Company D.  This contravened the Licensee’s contractual and legal obligations. 

The Licensee was obligated under an administration agreement, and in accordance with Principle 6, to keep adequate books and records to account for the purchase of assets.   

However, the Commission’s investigation identified that the Licensee failed to obtain adequate documentation (i.e. invoices) to confirm the purchase of any assets. 

The Licensee failed to adequately identify and manage conflicts of interests 

The Licensees (Conduct of Business) Rules 2009, 2014, 2015 and 2016 (the “COB Rules”) apply to investment Licensees conducting, amongst other roles, administration. 

Rule 11.1.1 of the COB Rules requires a Licensee to establish, implement and maintain an effective conflicts of interest policy. 

Principle 3.3 of the Code of Corporate Governance stipulates that: “Any transactions between the company and it is Board members should take place at arms’ length or be disclosed in detail at a Board meeting before the Board considers the transaction.” 

Example 1 

The Licensee had properly recorded that a number of directors (including those of the Licensee) of Scheme A sat on either the board of the scheme, the board of the Investment Adviser or the board of a further specialist Investment Adviser, specific to the asset class in question. 

The Licensee had properly recorded that one overseas director (“Person A”) sat on the boards of Scheme A, the Investment Adviser and a further specialist Investment Adviser.  The Licensee was also aware, and had recorded, that Person A sat on the board of his own non-local holding company, designed to hold the assets in question. 

The Commission’s investigation determined that whilst the Licensee did have a conflicts of interest policy, it was not effective, as it failed to introduce measures to counter, the influence Person A’s multiple linked directorships provided him. 

The investigation noted that on one occasion Person A sold to the Scheme his own assets (purchased previously by Person A using his own separate company), without an independent valuation and without the prior formal approval of the board of Scheme A.   These assets would form the majority of the assets purchased by the scheme. 

As detailed earlier, due to issues with the documentary proof of ownerships, these assets have not, to date, been sold. 

Example 2 

The Commission identified that a number directors (including those of the Licensee) sat on the boards of Company C and Company D.  The Commission noted that one overseas director (Person A from Scheme A), sat on the boards of Company C, Company D, but also on the board of the investment adviser to Company D. 

The Commission was not satisfied during its investigation that the Licensee fully understood the extent of these conflicts; and whilst some measures were in place to try and mitigate Person A’s multiple conflicts, the Commission determined these to be ineffective. 

The Commission noted that Person A was directly involved in the purchase of assets, but provided only verbal reports regarding these purchases, and not the sufficient documentary proof of purchase the Commission would have expected. 

The Licensee failed to obtain adequate client due diligence and enhanced due diligence in relation to its book of business 

All Licensees have to abide by The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations (the “Regulations”) and the accompanying Handbook. 

Regulation 4 relates to Customer Due Diligence.  This stipulates what CDD measures should be applied, when they should be applied and to whom they should be applied.

Regulation 5 relates to Enhanced Due Diligence.  This stipulates what enhanced EDD measures should be undertaken in respect of business relationships and occasional transactions, which are identified as high risk.  These measures include carrying out more frequent and more extensive ongoing monitoring. 

Regulation 15 relates to ensuring compliance with the Regulations.  This stipulates that a firm must establish such other policies, procedures and controls as may be appropriate and effective for the purpose of forestalling, preventing and detecting money laundering and terrorist financing; and that the board must take responsibility for reviewing this compliance. 

Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations. 

Example 1 

As detailed above, the Licensee administered a scheme referred to as Scheme B; Mr Gilligan was a director of the investment manager of Scheme B, and Mr Tracy and Mr Baudains were directors on the board of Scheme B. 

The assets of one of the cells of Scheme B included natural resources of high-value, requiring specialist expertise in the trade of these assets. 

These assets were acquired for the scheme by a person (“Person B”) described as an expert dealer in relation to this asset class.  It was known by the Licensee, and the relevant directors, that Person B had acquired the assets from his own company, and was therefore buying and selling his own assets. 

The Commission noted that concerns were raised with Mr Gilligan and Mr Tracy from the outset regarding the unusually cyclical nature of the transaction; the lack of documentary detail regarding Person B’s professional background in this specialist trade area; and the lack of a satisfactory rationale regarding the provenance of the assets. 

Regulation 4(3)(b) states that: “any person purporting to act on behalf of the customer shall be identified and his identity and his authority to so act shall be verified.” 

The Commission’s investigation determined that the Licensee, and the relevant directors, did identify Person B and did instruct further open source research to be conducted.  However, crucial red flags regarding Person B were either missed or not properly recognised.  These included: 

• Person B was not the same person as the person open source research had been conducted on; and 

• No documentary proof was obtained to verify Person B’s expertise in the specialist trade area. 

Example 2 

The Licensee, as part of its own initiative to improve its procedures regarding client due diligence, identified in March 2018 that it held incomplete client due diligence for approximately 64% of its investors at that time. 

The Licensee failed, at times, to effectively monitor business relationships and transactions 

Regulation 11 relates to the ongoing monitoring of customers.  This stipulates that identification data for high-risk relationships or customers should be reviewed on an ongoing basis; and scrutiny should be made of transactions, in particular those that appear unusual. 

Example 1 

The Licensee failed to monitor Scheme A effectively as they were, at times: 

• Unaware when assets had been purchased; 

• Did not obtain satisfactory evidence of the purchase of all assets; and 

• Placed an over reliance on verbal reporting from non-locally based board directors. 

Example 2 

The Licensee failed to monitor Company C and Company D effectively as they: 

• Released funds to an overseas company which was not listed as a counter-party on any agreement; 

• Failed to obtain any invoices for the purchase of assets; and 

• Placed an over reliance on verbal reporting from non-locally based board directors. 

Example 3 

The Licensee failed to monitor Scheme B effectively as they: 

• Did not adequately document the rationale for an unusual transaction involving assets with high-risk characteristics being bought and sold from the same person; and 

• Did not adequately determine the provenance of the assets mentioned above. 

The Commission noted that whilst the Licensee did engage a third party compliance consultant to review the transaction, they failed to act on a number of recommendations they made regarding further due diligence that should have been obtained. 

The Licensee failed, at times, to ensure proper books and records were kept and that these were readily retrievable 

Regulation 14 stipulates that a financial service business must keep a transaction document and any due diligence information. 

Principles 3 and 6 of the CSP Code stipulate that a Licensee should keep appropriate records and comply with the Regulations and the Rules. 

Principle 9 of the Principles stipulates that a financial institution should organise and control its internal affairs in a responsible manner, keeping proper records. 

Example 1   

The Licensee failed to obtain satisfactory ownership records in relation to Scheme A; and failed to obtain satisfactory purchase records in relation to Company C and Company D. 

The Licensee failed, at times, to exercise effective policies, procedures and controls for forestalling, preventing and detecting money laundering and terrorist financing 

Regulation 15 relates to ensuring compliance with the Regulations.  This stipulates that a firm must establish such other policies, procedures and controls as may be appropriate and effective for the purpose of forestalling, preventing and detecting money laundering and terrorist financing; and that the board must take responsibility for reviewing this compliance. 

Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations. 

Example 1 

The Licensee engaged a third party compliance consultant on 13 May 2016 to review their policies, procedures and controls.  The resulting compliance report identified that the Licensee had a number of areas, which were considered by the consultant to be inadequate.  These included inadequate procedures relating to: relationship risk assessments, enhanced due diligence and periodic risk reviews. 

These failings were considered by the Commission to have weakened the Licensee’s ability to combat fully the risk of money laundering and terrorist financing.    

The Directors failed, at times, to adhere to a director’s fiduciary duty to act in the best interest of a company 

In accordance with common law practice and Principle 3.4 of the Code of Corporate Governance, directors have a fiduciary duty to act in the best interest of a company. 

Example 1 

Mr Gilligan and Mr Tracy were found not to have acted in the best interest of Scheme A, as they failed to ensure that the purchase of assets from Person A was conducted on an arm’s length basis; and they placed too great a reliance on verbal information supplied to them, rather than obtaining satisfactory documentary proof that the scheme was operating as expected. 

Mr Gilligan and Mr Tracy were found not to have acted in the best interest of Company C and Company D, as they failed to obtain adequate documentary proof that assets purchased were made at fair market prices, based on independent evaluations. 

Mr Gilligan 

Mr Gilligan, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme A, Company C and Company D, as well as various other entities connected to these schemes / companies. 

Mr Gilligan was therefore well placed to benefit from first-hand access, not only to information necessary for the running of these entities, but also from contact with the other directors of these entities. 

The Commission’s investigation identified that Mr Gilligan failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.   

For example, Mr Gilligan: 

• Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; 

• Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of ownership; 

• Did not properly manage, on an ongoing basis, the numerous conflicts surrounding Person A and the actual impact this had on the scheme: i.e.  regarding the purchase of assets from Person A without an independent valuation; 

• Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D; 

• Permitted monies linked to Company C and Company D to be transferred to a company with no contractual links; 

• Permitted purchases of assets in relation to Company C and Company D without obtaining sufficient proof, such as invoices; and 

• Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted. 

Mr Tracy 

Mr Tracy, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme A, Scheme B, Company C and Company D, as well as various other entities connected to these schemes / companies. 

Mr Tracy was therefore well placed to benefit from first-hand access, not only to information necessary for the running of these entities, but also from contact with the other directors of these entities. 

The Commission’s investigation identified that Mr Tracy failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.   

For example, Mr Tracy: 

• Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; 

• Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of  ownership; 

• Did not properly manage, on an ongoing basis, the numerous conflicts surrounding Person A and the actual impact this had on the scheme: i.e.  regarding the purchase of assets from Person A without an independent valuation; 

• Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D; 

• Did not sufficiently address concerns regarding the lack of sufficient proof of purchases, (such as invoices), of assets in relation to Company C and Company D; and 

• Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted. 

Mr Baudains 

Mr Baudains, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme B. 

Mr Baudains was therefore well placed to benefit from first-hand access, not only to information necessary for the running of the scheme, but also from contact with the other directors of these entities. 

The Commission’s investigation identified that Mr Baudains failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.   

For example, Mr Baudains: 

• Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; and 

• Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted. 

Mr Lane 

Mr Lane was a director of the Licensee, but did not sit on the boards of the entities investigated by the Commission.  This position is reflected in the level of financial penalty imposed. 

The Commission’s investigation identified that Mr Lane failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.   

The Commission found that Mr Lane failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence. 

Aggravating factors 

The contraventions and non-fulfilments of the Licensee and the Directors in this case are serious as they have had a detrimental effect on certain clients and those invested in these clients, and have exposed the Firm and the Bailiwick to a significant risk of reputational damage.   

Under its administration, the board requested the suspension of Scheme A, which became effective in March 2014 and Company C and Company D were placed into voluntary liquidation in February 2017.  

The Licensee and the Directors’ failure to ensure that it had adequate policies, procedures and controls in place, as required by regulation, resulting in the Firm being vulnerable to the threat of money laundering and terrorist financing.  

Mitigating factors 

The Licensee initiated a comprehensive review of all of its procedures, before the Commission's investigation commenced.  This identified the need to undertake an extensive remediation programme, requiring the significant input of the Licensee and the directors. 

This remediation was determined by the Licensee to have been completed in 2019, and an independent assurance evaluation has confirmed this to the satisfaction of the Commission. A review by the Commission of the Licensee's board and committee minutes from October 2016 to June 2019 has also shown a marked improvement in the way that risks to the business are detailed and mitigated.    

It is accepted that the majority of the conduct described in this statement predates the Licensee's self-imposed remediation programme and is regarded as historic. 

At all times the Licensee and the Directors co-operated fully with the Commission and the inspectors.  The Licensee and the Directors agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalties and prohibitions. 

Certes Capital Limited (formerly Marlborough Pension Trustees Limited) (“Certes”)

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 ("the Financial Services Commission Law")

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 ("the Fiduciaries Law")

Certes Capital Limited (formerly Marlborough Pension Trustees Limited) ("Certes")

On 18 October 2019, the Guernsey Financial Services Commission ("the Commission") decided to make a public statement under section 11C of the Financial Services Commission Law in relation to Certes.

Certes is in voluntary liquidation, and the liquidators have confirmed that Certes is insolvent, and it is doubtful whether funds will remain for any significant dividend for creditors; but for that fact the Commission would have imposed a financial penalty in the sum of £30,000 upon Certes under section 11D of the Financial Services Commission Law. Any financial penalty imposed by the Commission therefore, would have adversely affected creditors or potential creditors of Certes.

The Commission considered it reasonable and necessary to make these decisions having concluded that Certes did not fulfil the requirements of the Minimum Criteria for Licensing, pursuant to Schedule 1 of the Fiduciaries Law, in particular in relation to the fit and proper criteria (paragraph 3) and integrity and skill criteria (paragraph 1), whilst it was licensed by the Commission.

In particular, with reference to Schedule 1 of the Fiduciaries Law, failings have been found in relation to:

1. Competence and soundness of judgement: paragraph 3(2)(a);

2. Compliance with rules, codes, guidance, principles and instructions issued by the Commission: paragraph 1(2)(b).

BACKGROUND

At the relevant time, Certes was licensed by the Commission under the Fiduciaries Law. Certes provided pension and savings solutions to both individual and corporate clients.

In October 2016, Certes became a managed trust company of another licensee under the Fiduciaries Law (Licensee A). Licensee A commissioned a review of investments held by pension schemes administered by Certes, which raised a number of concerns, that arose during the period from August 2009 until October 2016. The concerns centred around pension scheme members, introduced by one introducer, who were mainly former UK military personnel and who had transferred their UK Government defined benefit pension scheme to a defined contribution pension scheme administered by Certes. Certes, at the prompting of Licensee A, reported these concerns to the Commission in May 2017.

FINDINGS

Appointment of Investment Managers

The pension scheme’s trust deed set out that the trustees (ie Certes) may appoint one or more persons whom they consider to be suitably qualified and competent to manage the investment of any part or all of the pension fund to act as Investment Manager.

Certes appointed the introducer as the Investment Manager for the scheme members’ accounts. A Certes file note records that the introducer was not regulated. The file note also notes that the introducer has considerable UK pension experience. However, there was little evidence to corroborate this statement. Given that Certes was aware that the introducer was not regulated, it is not clear, on the evidence that was provided to the Commission, how Certes reached the conclusion that the introducer was suitably qualified and competent to be appointed as Investment Manager.

Certes subsequently removed the introducer as Investment Manager for scheme members’ accounts. The Commission was informed that the introducer was not performing in a sufficient way as Investment Manager and Certes felt it needed to appoint a qualified investment house.

The introducer was replaced as Investment Manager with an Isle of Man regulated investment management firm. However, Certes’ records show that this appointment was made on the recommendation of the introducer. There was no evidence to demonstrate whether any compliance checks or due diligence was undertaken in respect of the new Investment Manager, except to note that it was a regulated Isle of Man investment firm.

Certes failed to demonstrate that appropriate consideration, or investigation was undertaken, in respect of the new Investment Manager’s qualifications and competence. Certes appeared to have accepted their suggested appointment entirely on the recommendation of the introducer.

Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by failing to ensure that the introducer and the Investment Managers were competent and suitably qualified.

Due Diligence

Certes accepted the introducer on 5 August 2009 and this was communicated to the introducer. However, Certes’ internal due diligence approval form for the introducer was not completed by Certes until 13 August 2009, it was not signed off by the compliance officer until 26 November 2009 and senior management until 30 November 2009.

The due diligence forms and compliance checks on the introducer had not been completed prior to the acceptance of the introducer and were still being completed after it had been accepted.

Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by accepting the introducer prior to completing its due diligence checks.

Failure during client take on

The introducer was not a regulated entity, although there was no requirement for it to be regulated in its home country. As part of the acceptance of the introducer, Certes requested that clear pension transfer advice be provided on each case. Given the introducer was unregulated, this was a method by which Certes could assure itself of the introducer’s suitability and competence.

However, Certes only received and viewed the first few reports of pension advice, but as the advice was all very similar Certes felt that there was no need to continue to see the advice being provided by the introducer. Certes was unable to adequately explain how it satisfied itself that it was in each member’s best interest to transfer to the Certes managed pension scheme, from a UK Government defined benefit scheme, given that each member’s position would be different.

Certes was unable to provide copies of any pension transfer advice that it received when requested by the Commission. Certes subsequently explained to the Commission that it was not party to the pension transfer advice and that the discussions in respect of the transfer took place between the introducer and the member. This suggests that Certes did not see the pension transfer advice at all.

Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by failing to monitor the pension transfer advice, even where it had been identified that Certes should receive and review the advice so as to satisfy themselves that the introducer was competent.

Oversight of Investments

Certes provided annual valuations of its pension funds to its members. However, following a review carried out by an independent third party in 2017, the independent third party noted that the valuations may not have given an accurate reflection of the investments, due to the fact that a number of funds were suspended. The suspended funds had been given a full market value and not all assets had been revalued on a regular basis. Accordingly, the annual valuations were potentially misleading and suggestive that the investments were performing better than they were.

Certes appointed the independent third party to perform reviews of investments in 2012 and 2017. The review of client files showed, in many instances, that the underlying investments appeared to be in high risk investments, despite most members requesting a low or medium risk strategy.

Certes therefore failed to ensure that the investments were managed professionally, and responsibly, as required by section 4 of the Code of Practice – Trust Service Providers. In addition, this demonstrates Certes’ failure to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law.

Aggravating Factors

Certes has received a number of complaints from the former members of the UK Government pension schemes about the performance of their pension.

Mitigating Factors

Certes made minor efforts to rectify the issues identified, although they did not take sufficient steps to effectively remedy the issues.

Certes was open and co-operative with the Commission and has assisted with its enquiries. In addition, Certes brought the matters to the attention of the Commission

Mr Bruce David McNaught

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended (“the Financial Services Commission Law”);

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended (the “Fiduciaries Law”);

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the “POI Law”);

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended (the “IMII Law”);

The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended (the “Banking Supervision Law”); and 

The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended (the “Insurance Business Law”) (together “the Regulatory Laws”)

Mr Bruce David McNaught (“Mr McNaught”) - Born: 10 September 1961

On 8th June 2018, the Guernsey Financial Services Commission (“the Commission”) decided:

• to impose a financial penalty of £13,000 under section 11D of the Financial Services Commission Law on Mr McNaught;

• to make orders under section 17A of the Fiduciaries Law, section 18A of the IMII Law, section 28A of the Insurance Business Law, section 17A of the Banking Supervision Law, and section 34E of the POI Law, prohibiting Mr McNaught from: (i) holding the position of director, controller, partner, manager, financial adviser, general representative or authorised insurance representative (as applicable); and (ii) acting as Money Laundering Reporting Officer (“MLRO”) or Compliance Officer, within a person licensed under any of the Regulatory Laws, for a period of 4 years;

• to disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr McNaught for a period of 4 years; and

• to issue a public statement under section 11C of the Financial Services Commission Law.

On 9th August 2019, the Commission decided that the public statement under section 11C of the Financial Services Commission Law would be issued in the current form.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr McNaught failed to fulfil the minimum criteria for licensing (and in particular was not a fit and proper person to hold the positions of director, controller, partner or manager of an applicant or licensed fiduciary) under Schedule 1 to the Fiduciaries Law (and also was not a fit and proper person in terms of Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Supervision Law, and Schedule 7 to the Insurance Business Law, which set out the minimum criteria under these Laws).

BACKGROUND

Mr McNaught became a Non-Executive Director of a Guernsey entity licensed under the Fiduciaries Law (“the Licensee”) in June 2000, and was then employed by the Licensee as an Executive Director in May 2010. In 2013, he became a controller of the Licensee, and in 2014, MLRO.

As part of his terms and conditions of employment with the Licensee, among other things, Mr McNaught was not permitted to accept any other work, or have any interest in any other business or occupation, without the express permission of the Licensee.

In February 2010, Mr McNaught had established Candie Accounting (which after a time, also used “The Guernsey Accountants” as an alternative trading name).  He considered himself to be the proprietor/principal of that entity.  Candie Accounting was registered as a Prescribed Business in October 2014, with Mr McNaught as the MLRO.

In the period from May 2012 to February 2016, Mr McNaught incorporated 12 Guernsey registered companies for clients of Candie Accounting. However, in each instance, Mr McNaught made use of the Licensee’s registration with the Guernsey Registry (i.e., he used the Licensee’s online log-in details) in order to carry out the company incorporation.  Whilst Mr McNaught did carry out due diligence with respect to these various Candie Accounting clients (and later provided copies of that paperwork to the Commission), the material was held by Mr McNaught at his house.

In February 2016, the Licensee commenced a disciplinary investigation into Mr McNaught, with regard to his Candie Accounting business. During this process, in April 2016, Mr McNaught tendered his written resignation from the Licensee.

In March 2016, Mr McNaught had contacted the Commission. He indicated that he had occasionally incorporated a Guernsey company for clients of Candie Accounting, and had invoiced for that service through Candie Accounting rather than the Licensee. He thought that he might be in breach of the Prescribed Business Regulations, for which he apologised, and asked what the Commission wished done.  Mr McNaught also indicated that an exchange of emails with the Guernsey Registry earlier that month had led him to realise that he may be in breach of the Regulations. Company formation is a regulated activity that may only be carried out by the holder of a full fiduciary licence.

The Commission’s investigation focussed on:

• whether Mr McNaught contravened the Fiduciaries Law by (i) incorporating companies for clients of Candie Accounting, so that he conducted (by way of business) the regulated business of company administration without the appropriate license under the Fiduciaries Law; and (ii) offering to carry out company formation service (by way of business) without having the appropriate licence; and

• whether Mr McNaught fulfilled the minimum criteria for licensing, and in particular whether he was a fit and proper person to hold the positions of director, controller, partner or manager of an applicant or licensed fiduciary, under Schedule 1 to the Fiduciaries Law (and also whether he was a fit and proper person in terms of Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Supervision Law, and Schedule 7 to the Insurance Business Law).

FINDINGS

The Commission found that Mr McNaught failed to fulfil the minimum criteria for licensing in the Fiduciaries Law, and in particular that he is not a fit and proper person in terms of each of: (i) the Fiduciaries Law; (ii) the IMII Law; (iii) the Insurance Business Law; (iv) the Banking Supervision Law; and (v) the POI Law.

Schedule 1 of the Fiduciaries Law sets out the minimum criteria for licensing, with regard to that legislation.  These require, for example (and in broad terms):

- the carrying on of a licensed business with prudence and integrity; with appropriate professional skill; and in a manner which will not tend to bring the Bailiwick into disrepute as an international financial centre (Sch 1, para 1(1)).

- in conducting licensed business, acting in accordance with the Commission’s rules, codes, guidance, principles and instructions (and any other applicable enactment) (Sch 1, para 1(2)).

- key individuals involved with licensed businesses being ‘fit and proper’ persons (Sch 1, para 3). In determining this, regard must be had to a number of matters, which include:  probity, competence, experience and soundness of judgement; and knowledge and understanding of the legal and professional obligations.  Regard may be had to previous conduct and activities, in particular any evidence of (amongst other things):  (i) contraventions of the Fiduciaries Law; (ii) engagement in business practices which are improper or reflect discredit on his method of conducting business or his suitability to carry on regulated activities; and (iii) engagement in business practices, or conduct, which casts doubt on competence and soundness of judgment.

The Commission found that when Mr McNaught incorporated the 12 companies for clients of Candie Accounting, he was doing so as the principal of Candie Accounting. It was an activity regulated by the Fiduciaries Law and carried on by him by way of business - and accordingly he required a licence to do so. Mr McNaught did not hold the appropriate licence as the principal of Candie Accounting.  For a period between August 2015 and March 2016, Mr McNaught offered on the Candie Accounting Website, the service of Guernsey company formation. In doing so, he offered to carry on a regulated activity, by way of business, without the required licence. Accordingly, the Commission found that Mr McNaught had contravened the Fiduciaries Law in these respects. Even had the incorporations been carried out in his capacity as a director of the Licensee and with their awareness, the Commission considered that the manner in which Mr McNaught carried out the company incorporations would in any event have placed the Licensee in breach of obligations under the Bailiwick’s AML/CFT Regulations (the “POC Regulations”) and the Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (the “Handbook”).

Mr McNaught’s position that he did not ignore, but was not sufficiently conversant with, the legislation applicable to the activities which he was carrying out (i.e., the applicable rules on who was permitted to carry out company incorporations), indicated a lack of the necessary knowledge and understanding of legal and professional obligations, and a lack of prudence.

Mr McNaught was not fully candid with the Licensee about his incorporation of the 12 companies, and the full circumstances and purpose of those incorporations.  Given that Mr McNaught was using his access to the Guernsey Registry as a director of the Licensee to carry out the incorporations, this was a serious matter.

Despite being a director of the Licensee, Mr McNaught failed to act in the company’s best interests.  For a period of around 6 years he carried on personal business as the principal of Candie Accounting, without the Licensee’s permission - and making use of his access to the Guernsey Registry as a director of the Licensee.  Furthermore, whilst it was of comfort that Mr McNaught did carry out due diligence on the Candie Accounting clients for whom the companies were formed, that material was held by him at home and was not held by the Licensee. There was no record on the Licensee’s system as to where that documentation could be obtained, and it was not therefore readily retrievable.  The Licensee could not carry out the periodic review of ease of retrieval required of Licensees.  Further, Mr McNaught’s actions involved conducting business using the Licensee’s resources that he knew was not covered by the Licensee’s Business Risk Assessment (“BRA”). All of this was done to benefit Mr McNaught’s personal interests as the principal of Candie Accounting.

Mr McNaught was unable to explain how he came to offer services on his website, which he ought not to have offered.

After the incorporation of the 12 companies came to light, Mr McNaught was in communication with the Commission and was interviewed, and his legal representative also made written representations on his behalf.  Inconsistencies in the various accounts which Mr McNaught offered of what occurred, caused the Commission concern about Mr McNaught’s openness and honesty during the investigation.

Accordingly, the Commission considered that doubt is cast on Mr McNaught’s competence, and also on his probity and the soundness of his judgment. Further, the Commission considered that he engaged in business practices which were improper, and reflect discredit on his method of conducting business and his suitability to carry on regulated activities.

Mitigating factors

• There is no suggestion that an individual or corporate client sustained financial loss as a result of Mr McNaught’s contraventions of the Fiduciaries Law. Mr McNaught made only a modest amount from the company incorporations, although this must be balanced against the licensing costs which a licensed fiduciary would have paid over the period.

• Mr McNaught did voluntarily attend an interview with the Commission, and provided certain documentation.

• Mr McNaught did offer to take any necessary steps, and provided an assurance that the issue would not re-occur when he contacted the Commission in March 2016.  The Candie Accounting website was changed in March 2016, so that the service of company incorporation was no longer offered.  Mr McNaught has indicated that he is not engaged in a regulated services business, and has no intention of re-engaging in this.

Aggravating Factors

• The non-fulfilment of the minimum criteria for licensing was constituted by deliberate actions on Mr McNaught’s part, which were his direct responsibility.  Mr McNaught was experienced as a director of a fiduciary and MLRO, but did not appear to know that he was not permitted as the principal of Candie Accounting to carry out the company incorporations. This implies he was not sufficiently familiar, and did not take adequate steps to familiarise himself, with the relevant legislation before carrying out (or offering to carry out) the company incorporations. Even had the company incorporations been carried out in his capacity as a director of the Licensee, the manner in which Mr McNaught carried these out would have placed the Licensee in breach of obligations under the POC Regulations and the Handbook.  Where a person carries out regulated activities without taking sufficient steps to consider, and ensure that (s)he is acting in accordance with, the appropriate legislation, the Commission considers that there is an element of recklessness.

• Mr McNaught appeared not to appreciate, and attempted to downplay, the seriousness of his conduct.

Whilst Mr McNaught did bring the conduct in question to the attention of the Commission, he did so only after the Licensee had commenced a disciplinary process against him as a result of his incorporation of the 12 companies.  He also failed to disclose the disciplinary process to the Commission.  Accordingly, this can be no better than a neutral factor.

Louvre Trust (Guernsey) Limited, Derek Paul Baudains, Jonathan Ross Bachelet, Haidee Louise Stephens, Julian Dai Lane, Charles Peter Gervais Tracy

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”);

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”);

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 (the “Regulations”);

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (the “Handbook”)

Louvre Trust (Guernsey Limited) (the “Licensee” or the “Firm”)

Mr Derek Paul Baudains (“Mr Baudains”)

Mr Jonathan Ross Bachelet (“Mr Bachelet”)

Ms Haidée Louise Stephens (“Ms Stephens”)

Mr Julian Dai Lane (“Mr Lane”)

Mr Charles Peter Gervais Tracy (“Mr Tracy”) (together “the Directors”)

On 18 June 2019 the Guernsey Financial Services Commission (“the Commission”) decided:

• To impose a financial penalty of £70,000 on the Licensee under section 11D of the Financial Services Commission Law;

• To impose a financial penalty of £8,400 on each of Mr Baudains and Ms Stephens under section 11D of the Financial Services Commission Law;

• To impose a financial penalty of £7,000 on Mr Lane under section 11D of the Financial Services Commission Law;

• To impose a financial penalty of £5,600 on each of Mr Bachelet and Mr Tracy under section 11D of the Financial Services Commission Law; and

• To make this public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee and the Directors had failed to ensure compliance with the Regulations, the Handbook, the Code of Practice - Corporate Service Providers, Instruction 6 of 2009 and the minimum criteria for licensing set out in Schedule 1 of the Fiduciaries Law.

BACKGROUND

In 2007, the Licensee was established in Guernsey.  It was licensed under the Fiduciaries Law on 3 April 2008. 

Mr Baudains is a director of the Licensee and was appointed from 20 December 2007.

Ms Stephens was a director of the Licensee from 20 December 2007 to 3 September 2018. 

Mr Bachelet is a director of the Licensee and was appointed from 1 January 2014.

Mr Lane was a director of the Licensee from 27 October 2011 to 5 September 2018.

Mr Tracy was a non-executive director of the Licensee from 20 December 2007 to 5 December 2016.

The Commission conducted an on-site visit to the Licensee between 25 April 2016 and 5 May 2016 (the “2016 visit”). 

The purpose of the 2016 visit was to carry out a financial crime risk assessment of the Firm.  In doing so the Commission reviewed (among other things) a selection of customer files.  

During the 2016 visit and the subsequent investigation the Commission identified serious failings in respect of the Licensee’s and the directors’ compliance with applicable anti money laundering / countering the financing of terrorism related regulations. 

The issues fell broadly into the following categories:

1. The Licensee did not always identify all high-risk factors when risk assessing its clients;

2. The Licensee did not always adequately risk assess a client relationship at the outset and/or failed to carry out the periodic ongoing client risk assessment required by the Regulations and the Handbook; 

3. The Licensee failed on multiple occasions to obtain adequate due diligence on client business relationships, including high-risk relationships;

4. The Licensee did not always adequately monitor customer relationships;

5. The Licensee failed to comply fully with Instruction 6 of 2009;

6. The Licensee failed to maintain adequate board minutes, records of its customers, and the rationale that supported a decision to approve a high-risk transaction;

7. The Licensee failed to have adequate policies, procedures and controls to forestall, prevent and detect money laundering and terrorist financing;

8. The Licensee unintentionally misled the Commission in its written response to the findings of the 2016 onsite visit;

9. The Directors, during the periods when they were directors of the Licensee, failed to consider the appropriateness and effectiveness of the Licensee’s compliance with the Regulations and the Handbook or review the Licensee’s compliance with the Regulations and the Handbook at appropriate intervals; 

10. The Directors also failed to ensure that the Commission was advised of material failures to comply with the provisions of the Regulations and the rules in the Handbook, and of any serious breaches of the Licensee’s policies, procedures or controls;

11. The Licensee and the Directors failed to comply fully with the minimum criteria for licensing under the Fiduciaries Law.

FINDINGS

The Commission’s investigation found:

The Licensee did not always identify all high-risk factors when risk assessing its clients

The Licensee failed on a significant number of occasions to identify all high-risk factors in high-risk client relationships, such as high-risk countries and high-risk activities.  Identification of these high-risk factors would have led to a more accurate enhanced due diligence focus. 

The Licensee did not always adequately risk assess a client relationship, and/or failed to carry out periodic ongoing client risk assessment

The Licensee failed on a number of occasions to identify client relationships as high-risk.  The Licensee also failed on occasion to conduct periodic ongoing reviews of its client risk assessments, including a high-risk client that was not reviewed for almost three years. 

These failures in respect of client risk-assessments meant that the Firm was not able to ensure that its policies, procedures and controls on forestalling, preventing and detecting money laundering and terrorist financing were appropriately and effectively implemented, having regard to the appropriate risk-rating.

The Licensee failed on multiple occasions to obtain adequate due diligence on client business relationships

As a result of the 2016 onsite visit, the Licensee reviewed its entire client base and identified subjects that required customer due diligence (the “verification subjects”).  The Licensee concluded that 28% of its verification subjects required remediation.  The Firm also identified that just over a quarter of the high-risk verification subjects required remediation.  This evidences that there were large-scale systemic failings in the Licensee’s duty to have adequately conducted and reviewed client due diligence and enhanced due diligence prior to the 2016 onsite visit. 

The Licensee did not always adequately monitor customer relationships

Since 2008 the Licensee has failed to always effectively monitor its business relationships, with insufficient consideration being given to the potential risks that the legal structures could be used to launder money or finance terrorism.  In particular:

• the Licensee failed to conduct additional scrutiny of a transaction that, on the same day, saw assets being on-sold through a legal arrangement which, increased the value of the assets involved in the transaction by €4.5million;

• the Licensee failed to effectively scrutinise the movement of millions of US dollars between jurisdictions via generic consultancy agreements and interest-free loans, whilst also failing to identify this as a high-risk relationship;

• the Licensee failed to effectively scrutinise the source of funds for a transaction involving a high-risk business relationship prior to its decision to authorise the transaction.  At the time of the transaction the Firm had concerns that the source of funds may be linked to a sanctioned entity, but due diligence to confirm the legitimate source of funds was not received until after the transaction had taken place; and

• the Licensee failed to raise the risk assessment of a client from medium to high-risk until after the 2016 onsite visit, despite knowing since 2008 that the client was under investigation for criminal matters and had been charged in 2013 with conspiracy to defraud investors.

The Licensee did not always correctly risk rate its client risk assessments.  A number of client business relationships were rated as medium-risk at the time of the 2016 onsite visit, yet re-rated to high-risk after the 2016 onsite visit, following the Firm’s review of its customer risk assessments as part of a remediation programme.  The Licensee’s failure to identify these clients as high-risk prior to the 2016 onsite visit led to a failure to adequately monitor these business relationships as required under a risk-based approach.  This reduced oversight increased the potential for money laundering and terrorist financing to occur undetected, and increased the reputational risk to the Bailiwick of Guernsey as a finance centre.

The Licensee failed to comply fully with Instruction 6 of 2009

In 2009, the Commission issued Instruction Number 6 requiring licensees to review policies, procedures and controls in place in respect of existing customers to ensure that the requirements of regulations 4 and 8 of the Regulations and each of the rules in Chapter 8 of the Handbook were met.  Licensees were required to satisfy themselves that customer due diligence information appropriate to the assessed risk was held in respect of each business relationship by close of business on 31 March 2010.  Where a licensee could not meet the regulations by the deadline they were required to terminate the business relationship. 

The large volume of the Firm’s verification subjects that had customer due diligence deficiencies (28% of its customers), indicates that the Firm had failed to comply with Instruction Number 6.

The Licensee failed to maintain adequate records

The Firm failed to keep adequate records, including (but not limited to) failing to:

• keep customer due diligence and enhanced due diligence as required by the Regulations and the Handbook;

• record or retain any documentation recording its compliance officer’s rationale for a decision to approve a dividend payment in a high-risk business relationship;

• keep accurate records of board minutes for a client company that the Firm administered.

The Licensee failed to have adequate policies, procedures and controls to forestall, prevent and detect money laundering and terrorist financing

The Directors failed to establish effective policies and procedures for assessing the adequacy and effectiveness of the Licensee’s compliance with the Regulations and the Handbook.  The Firm failed to have a formal Compliance Monitoring Programme (“CMP”) in place until January 2014.  The CMP introduced in 2014 still required significant improvements to be made to it as late as March 2017, almost 10 years after the introduction of the Regulations that required the Licensee to have an effective CMP in place.  The Licensee’s failure to have an effective CMP restricted the Firm’s ability to monitor its capacity to forestall, prevent and detect money laundering and terrorist financing. 

The Directors failed in their duty to review the Firm’s compliance with the Regulations and the Handbook, and ensure that the Licensee had appropriate and effective policies, procedures and controls in place.  

The Licensee misled the Commission in its written response to the 2016 onsite visit

The Licensee and the Directors unintentionally misled the Commission surrounding the timing of the Firm’s receipt of bank statements used to ascertain whether funds were sourced from a sanctioned entity.  The Licensee and the Directors provided documentation that was misleading to the Commission for the purpose of justifying the Firm’s actions in respect of authorising a dividend payment.  In so doing the Licensee and the Directors acted without due diligence and sound judgement. 

The Licensee failed to comply fully with the Fiduciaries Law

The Commission concluded that the Licensee had failed to comply fully with the Fiduciaries Law, specifically paragraphs 1(1)(a), (b) & (c) and 3(2)(a), (b) & (e) of the minimum criteria for licensing set out in Schedule 1 to that Law.  The Licensee failed to act:

• with prudence, integrity, professional skill appropriate to the nature and scale of its activities, and in a manner which will not tend to bring the Bailiwick into disrepute as an international finance centre; and

• with diligence, competence, soundness of judgement, or with a knowledge and understanding of the legal and professional obligations to be undertaken.

The Commission also concluded that the Directors all failed to comply fully with the Fiduciaries Law, specifically paragraphs 3(2)(a), (b) & (e) of the minimum criteria for licensing set out in Schedule 1 to that Law.  The Directors each failed to act with diligence, competence, soundness of judgement, or with a knowledge and understanding of the legal and professional obligations to be undertaken.

Aggravating factors

The contraventions and non-fulfilments of the Licensee and the Directors in this case are serious, and expose the Firm and the Bailiwick to a significant risk of financial crime. 

Through its systemic failings the Licensee had potentially enabled specific structures that it administered to be involved in money laundering or terrorist financing. 

The potential to facilitate the movement of substantial amounts of funds, unhindered around the globe over a long period is of serious concern to the Commission.  The Firm has acted in a manner that could bring the Bailiwick into disrepute as an international finance centre.

The Licensee’s and the Directors’ omission to instigate a formal CMP until January 2014, and the improvements required to be made to that formal programme when it was introduced, meant the Firm was unable to identify the serious systemic failings in its policies, procedures and controls prior to the 2016 onsite visit.  It is an essential role of the board of a regulated entity to implement effective policies, procedures and controls to forestall, prevent and detect money laundering and terrorist financing in order to protect against financial crime, which can have a serious detrimental effect on the reputation of the Licensee and the Bailiwick as an international finance centre. 

Mitigating factors

At the request of the Commission the Licensee instigated a Risk Mitigation Programme, which amongst other matters, reviewed and made fundamental changes to the policies, procedures and controls for forestalling, preventing and detecting money laundering and terrorist financing. A complete customer due diligence review was also conducted.  An updated CMP has been operating since October 2017, and as of August 2018 training had been completed for all staff on the effective completion of client risk assessments.  Since the investigation began the Licensee has strengthened its risk and compliance team and undertaken additional risk-rating. 

At all times the Directors and the Licensee co-operated fully with the Commission.  The Licensee and the Directors agreed to settle at an early stage of the process, and this has been taken into account by applying a 30% discount in setting the financial penalty.

The financial penalties imposed on each of the Directors have been calculated to take account of the periods during which each person was a director of the Licensee, and their respective responsibilities. 

End

Vida Financial Services Limited, Jonathan James Wilson

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”)

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the “IMII Law”)

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”)

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) (together the “Regulatory Laws”)

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007, as amended (the “Regulations”)

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (the “Handbook”)

Vida Financial Services Limited (“Vida”)

Mr Jonathan James Wilson (“Mr Wilson”)

On 28 March 2019, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £30,000 under section 11D of the Financial Services Commission Law on Vida;

2. To impose a financial penalty of £20,000 under section 11D of the Financial Services Commission Law on Mr Wilson;

3. To make orders under section 17A of the Fiduciaries Law; section 18A of the IMII Law; section 28A of the Insurance Law; section 17A of the Banking Law; and section 34E of the POI Law, prohibiting Mr Wilson from performing the functions of director, controller, partner or manager of a regulated entity under any of the Regulatory Laws (together the “Prohibition Orders”);and

4. To make a public statement under section 11C of the Financial Services Commission Law.

On 18 June 2019, following the decision of the Guernsey Court of Appeal in Chairman of the Guernsey Financial Services Commission v Y (Court of Appeal, 17 June 2019) that reinstated the Commission’s power to issue time-limited prohibitions, the Commission decided:

5. To vary the Prohibition Orders made on 28 March 2019 so that they will expire on 30 September 2021; and

6. To revoke the public statement issued on 28 March 2019, and replace it with this statement. 

The Commission considered it reasonable and necessary to make these decisions having concluded that Vida and Mr Wilson did not fulfil the requirements of the Minimum Criteria for Licensing (“MCL”), pursuant to Schedule 4 of the POI Law. In addition, the Commission also concluded that Mr Wilson does not fulfil the equivalent MCL requirements under the IMII Law, the Insurance Law, the Banking Law and the Fiduciaries Law.

In particular, with reference to Schedule 4 of the POI Law, failings have been found in relation to:

• Competence, experience and soundness of judgment: paragraph 1(1)(a);

• Diligence: paragraph 1(1)(b);

• Knowledge and understanding of the applicable legal and professional obligations: paragraph 1(1)(e);

• Engagement in business practices which reflect discredit on suitability to carry on regulated activity: paragraph 1(2)(c)(ii);

• Prudence, integrity and professional skill: paragraph 2(1)(a) and (b);

• Carrying on business in a manner which will not tend to bring the Bailiwick into disrepute as an international finance centre: paragraph 2(1)(c);

• Compliance with the rules, codes, guidance, principles and instructions issued by the Commission: paragraph 2(2);

• Business being directed by at least two individuals: paragraph 3; and

• Conducting business in a prudent manner: paragraph 5.

Background

Vida was incorporated in Guernsey in August 1989. Mr Wilson became the controller of Vida in October 2012 and a director of Vida in November 2012. Mr Wilson is also the managing director of Vida. Until 30 December 2018 Vida was licensed under the POI Law and was formerly licensed under the IMII Law.

Vida was the Principal Manager of a fund structured as a Protected Cell Company (the “Fund”), and the investment manager of two cells of the Fund (“Cell A” and “Cell B” respectively). Vida also acted as investment manager to approximately 1,300 alternative investment funds (“AIFs”) based in the United Kingdom related to fractional ownership schemes, and provided investment advisory services to a small number of trust clients.

An on-site visit was conducted by the Commission in December 2016, which identified a number of concerns, including a lack of a robust compliance culture, incomplete policies, procedures and controls, poor quality board minutes and an unfinished compliance monitoring programme.

Director A was appointed Compliance Director of Vida Financial Services Limited in October 2016 and resigned in April 2017, leaving Mr Wilson as the sole remaining director of Vida. From that time Vida was in breach of paragraph 3 of the MCL, which requires a licensee to be directed by at least two individuals of appropriate standing, experience and independence.

The Commission’s investigation focussed on the company’s record keeping, compliance with reporting obligations, the provision of investment advice to a Guernsey trust company and Vida’s provision of investment management services to collective investment schemes (including the Fund, Cell A, Cell B and the AIFs involved with fractional ownership schemes). As part of its investigation the Commission also considered the role of Mr Wilson, as the Managing Director and only constant director during the period from 2013 to date, in relation to the issues identified within Vida and whether Mr Wilson ensured that the board of Vida met its regulatory requirements and, whether as a result, he complied with the MCL.

Findings

Vida

Record Keeping

The Commission reviewed copies of Vida’s Board minutes for the period 1 November 2013 to 16 June 2017. Vida’s record keeping in the form of board minutes and financial records was extremely poor.

The majority of board minutes reviewed were unsigned (so that there is no indication that the minutes had been approved by the board) and were of very poor quality. The minutes made very few references to the Fund and did not clearly set out the decisions of the board. The board minutes did not contain sufficient information of the discussions that were had in relation to Cells A and B.

Vida accepted that the level and quality of financial records and reporting available could have been improved in order to present the fullest picture of Vida’s financial position. The lack of accounting records and oversight of the financial position of Vida had been an ongoing issue for some years. No management accounts were produced to the board during the period 2014 to 2016. It was accepted that management accounts were not being prepared, and Vida did not have the in-house skills to prepare and maintain appropriate accounting and other records that the Commission would expect of a licensee.

The Commission found that by failing to maintain adequate business and financial records of its business Vida breached both Rule 4.1.1 and Rule 6.1.4 of the Licensee (Conduct of Business) Rules, 2016 (the “Licensee Rules”) and did not conduct its business in a prudent manner, in breach of paragraph 5(1) of the MCL.

Change of Control of Vida

The Commission became aware in April 2017 that another company (“Company A”) had a 49% shareholding in Vida. The change occurred in 2012, and no written notification of the change in control had been received by the Commission in accordance with section 27C of the POI Law. This was a breach of section 27C of the POI Law.

Vida’s role in relation to the Fund, Cell A and Cell B

Vida was the Principal Manager of the Fund, as well as the Investment Manager to Cells A and B. Mr Wilson was also a director of the Fund (and between 1 June 2017 and 3 October 2018 was the sole director).

The Commission had a number of concerns regarding the Fund, including:

• Records to reflect Vida board discussions and deliberation on matters related to the Fund were sub-standard;

• Mr Wilson had reported to the Fund board without the knowledge of Director A; and

• The reporting provided by Vida to the Fund board did not provide the kind of performance data that Vida ought to have been providing.

In relation to Cell A, a large part of the investment process was driven by algorithmic modelling and analysis. However, Vida’s investment management reports to the Fund board were basic and provided little, if any, information on the performance of Cell A. The reports also failed to adequately explain how Vida had managed the investment and reinvested the assets of Cell A. This was a breach of both the governing Investment Management Agreement and Rule 4.01(2) of the Class B Rules.

A large part of Vida’s role in respect of Cell B was undertaken by a Fund Oversight Manager. The services to be provided by the Fund Oversight Manager included assisting the administrator with completion of monthly net asset values, ongoing monitoring of the assets of Cell B, oversight of any investment advisors, assisting both Vida and the administrator with cash-flow management, and producing monthly reports for Vida and the Fund. The monthly reports were to include reviews of the investment assets of Cell B, cell performance, and general Cell Activities and transactions.

Vida was unable to provide any records in respect of the investment management decisions made regarding the assets of Cell B. The monthly reports that should have been provided by the Fund Oversight Manager were not received.

Mr Wilson did not believe Vida had any responsibility for Cell B, despite Vida being named as the investment manager in the scheme particulars. This belief was consistent with the lack of records in relation to Cell B held by Vida.

As a result of the above, the Commission concluded that Cell B had not been managed by Vida in accordance with the scheme particulars or the Class B Rules. Further, the Vida directors were unable to take collective responsibility for directing and supervising Vida’s role as Principal Manager to the Fund contrary to Principle 2 of the Finance Sector Code of Corporate Governance.

Investment advice and conflicts of interest

Vida was the investment adviser to a Guernsey trust company (“Trustee A”). At the same time, the only investors in Cell A were six trusts of which Trustee A was the trustee.

Although there was a client agreement setting out the services that Vida contracted to provide to Trustee A, Vida failed to provide services in accordance with that agreement. In particular, Vida was not independent and it did not advise on the products of different companies. When providing its investment advice Vida failed to recommend any options other than investment in Cell A.

Further, Mr Wilson failed to manage the conflict of interest between Vida acting as investment adviser to the trusts and investment manager of Cell A in a way that would be expected of a licensee. Although Vida had disclosed to its main point of contact, and one or more of the trustees at Trustee A that it would only invest its funds in Cell A, Vida did not fully or adequately disclose the fact that it would receive fees from both Trustee A and Cell A as a result of investments into Cell A to Trustee A such that it was clear that Trustee A had given its informed agreement to this. When Trustee A did subsequently raise an issue regarding Vida’s receipt of fees from both sources, Vida agreed to waive receipt of any fee from Cell A.Further, Vida did not record the disclosures it had made in writing within Vida’s conflicts register or update its client agreements.

The Commission found that Vida generally did not obtain and consider the risk profile of each individual trust before making its investment recommendation. A risk assessment questionnaire should form part of a licensee’s gathering of facts about a client prior to providing any recommendation. Without such information, the licensee cannot provide adequate advice that is suitable to the specific requirements of each client.

Failure to assess the clients’ risk appetites prior to providing advice, together with the failure to consider options other than investment in Cell A meant that the investment advice could not be suitable to the needs of the client, as required by Rule 5.2.2 of the Licensee Rules.

Vida’s conflicts of interest policy was also wholly inadequate. The conflicts register only included the directors’ personal conflicts and failed to consider Vida’s conflicts that arose as a result of the various roles it played in respect of different entities. As a result, Vida was in breach of Rules 11.1 and 11.2 of the Licensee Rules.

Role in relation to the AIFs

Fractional ownership is the shared ownership of an asset, in this instance, ownership of holiday apartments and villas located on resorts. Ownership is shared via a UK Limited by Guarantee Company (“LBG”), administered by a UK administrator. The LBG has memberships, not shares, and memberships of the Company are sold. The LBG becomes the registered owner of the property asset and declares that it is held in trust for its members.

The FCA deems the LBGs to be a type of collective investment scheme and subject to regulation under the Alternative Investment Fund rules. If a small AIF Manager from a third country (such as Vida) is appointed rather than the AIFs being internally managed, the AIFs have to register with the FCA but pay a substantially reduced FCA annual fee.

Vida carried out insufficient due diligence in terms of the nature and structure of the business itself before agreeing to provide investment management services to the LBGs.

Investors were informed by the UK administrator, with Mr Wilson’s knowledge, that Vida had been appointed as investment manager prior to the investment management agreements having been approved by the Vida board. Mr Wilson failed sufficiently and/or in writing to challenge the UK administrator’s inaccurate statement and have it corrected, despite the fact that it was represented that Vida had been appointed investment manager to the AIFS before Vida’s board had given due and proper consideration to the proposals.

The directors of Vida approved the provision of investment management services to each of the LBGs, and the signing of the respective investment management agreements. However, the agreements that were ultimately executed were expressed to be retrospective, so as to have effect from a date prior to the board having agreed to provide the investment management services. Based on the board minutes, there was no board approval as to retrospectivity.

The board minutes approving the agreements recorded in one part that the relationship between the AIFs and manager should be substantive. However, a later portion of the same minutes notes that given the absence of any significant assets, or the requirement for any significant active management role, the requirements on Vida would be very limited. Mr Wilson stated to the Commission that the AIFs were managed actively but it was subsequently represented that Vida’s role was extremely limited. There was to have been no clear understanding on the part of either of Vida’s director as to Vida’s precise role in relation to the investment management of the AIFs and its extent, and indeed as to the structure of the AIFs and how they worked.

Vida made a decision to treat the UK administrator of the LBGs as an introducer in accordance with Regulation 10 of the Regulations. Regulation 10(3) provides that where reliance is placed upon an introducer the responsibility for complying with the relevant verification provisions of Regulation 4 remains with the receiving financial services business (in this case Vida).

The Commission found that Vida failed at the outset to adequately satisfy itself that the introducer would be able to provide the requisite customer due diligence upon request. Vida also failed to obtain and maintain the appropriate introducer certificate.

As a result, Vida was in breach of Rules 157 and 158 of the Handbook, Regulation 10 and Regulation 4.

The Commission also had concerns about the lack of information received by Vida in respect of the performance of the AIF assets. Vida only requested performance information after the Commission had first requested this information from Vida.

Vida received and paid invoices in relation to the AIF business from two third party companies. However, Vida was not able to explain to the Commission the purpose or rationale for payment to one of those companies or provide any evidence of the arrangement between it and Vida. In relation to the other company, the board minutes do not evidence approval of the arrangement or remuneration.

Vida failed to take timely action to investigate and address a number of red flags that appeared following its appointment as investment manager to the AIFs. These included the lack of input required by it, the lack of performance data provided and questions not being answered.

Minimum Criteria for Licensing

On the basis of the failings identified above the Commission concluded that Vida has failed to fulfil the requirements of the MCL in the following respects:

• Failing to be fit and proper as a result of failures including:

- Lack of sufficient competence, experience, sound judgment and diligence;

- Insufficient knowledge and understanding of its legal and professional obligations;

- Failing to act in accordance with the provisions of the POI Law;

• Failing to carry on business with prudence, integrity and professional skill;

• Failing to carry on business in a manner which will not tend to bring the Bailiwick into disrepute as an international finance centre;

• Failing to comply with rules, codes, guidance, principles, guidance and instructions issued by the Commission;

• Only having one person directing the business of Vida;

• Failing to conduct its business in a prudent manner by among other things, failing to maintain adequate accounting and other records of his business.

Mr Wilson

Conflicts of Interest

As well as being a director of Vida, for a time Mr Wilson was also a director of the Fund. Mr Wilson admitted that as a consequence he did not always know which hat he was wearing when dealing with the Fund (i.e. director of the Fund or director of Vida).

Mr Wilson showed a lack of understanding of how actual and potential conflicts of interest in relation to both Vida and himself should be managed.

Lack of understanding of responsibilities as director

The impression given by the way that Mr Wilson has allowed Vida to be run, including the failure to resolve issues despite the regulatory history and his evidence in seeking to shift the responsibility for regulatory compliance wholly or largely onto others, is that Mr Wilson did not adequately understand his own duties as a Director and controller of a licensee, focusing instead on the investment side of the business which was his main interest. He failed to appreciate that as such he was responsible for all aspects of Vida’s business and needed personally to dedicate sufficient time and attention to ensure regulatory compliance.

Lack of understanding of his and Vida’s roles and responsibilities

Mr Wilson demonstrated a lack of understanding of his and Vida’s roles in respect of both Cell A and Cell B. The Commission also found that Mr Wilson failed adequately to understand the role that Vida should have played as investment manager to the AIFs, and the structure of the AIFs at the time of Vida entering into the investment management agreements with the AIFs and for some months thereafter.

The Commission was also concerned by Mr Wilson’s agreement to the retroactive effect of the investment management agreements in relation to the AIF business, without the consent of the Vida board at the board meeting at which they were approved.

Lack of understanding of legal separation between himself and Vida

The Commission concluded that Mr Wilson did not fully understand the segregation between himself and Vida as separate legal entities. He treated Vida as his second personal bank account, using it to buy his personal motor vehicles, and withdrawing money from the company without adequate records of why this was being taken from Vida.

Failure to provide information to the Fund board and other Vida directors

Mr Wilson acted as if he personally was the investment manager of Cell A, and that Vida had a different role. Mr Wilson failed to provide sufficient information to the Fund board. He also failed adequately to share information with the Vida board in respect of Cell A which denied the board the ability to comply with Principle 2 of the Finance Sector Code of Corporate Governance.

Two new directors were appointed to the Vida board in May 2017. However they both resigned in June 2017 as Mr Wilson had failed to disclose to them that Vida was under investigation by the Commission.

Failure to prepare regular management accounts

Mr Wilson did not seem to understand the need, or how, to monitor Vida’s financial position and, at least until January 2017, instead relied upon the last set of audited accounts, the bank statements, a working spreadsheet and other documents. Mr Wilson conceded that formal management accounts were not being prepared prior to January 2017.

Failure to prepare minutes of Vida board meetings

Mr Wilson admitted in interview that he was responsible for writing up board minutes but did not do so. The quality of the board minutes appeared to have significantly improved after the appointment of Director A in November 2016.

Minimum Criteria for Licensing

On the basis of the failings identified above the Commission concluded that Mr Wilson has failed to fulfil the requirements of the MCL by failing to be fit and proper as a result of failures including:

• Lack of sufficient competence, experience, sound judgment and diligence;

• Insufficient knowledge and understanding of his legal and professional obligations.

Mitigating Factors

• Mr Wilson and Vida have co-operated throughout the enforcement process, and have made a number of admissions regarding failures to maintain proper board minutes, accounting and other records, failure to comply with its reporting obligations and failure to ensure proper oversight and reporting on Cell A.

• There is no indication that the failures occurred as a result of dishonesty or any lack of probity or integrity. The contraventions arose predominantly due to Mr Wilson’s severe lack of understanding of the roles of Vida and his and Vida’s duties and obligations.

• Vida and Mr Wilson have made a number of attempts to rectify the contraventions and non-fulfilment and prevent a recurrence. In the first instance, Director A and a compliance consultant were appointed. However, both resigned after approximately six months, at least in part, due to Mr Wilson’s lack of co-operation in improving Vida’s governance, risk and compliance controls.

• The Commission’s understanding is that no actual losses have been incurred by investors to date.

• On 30 December 2018, Vida requested that the Commission cancel its licence under the POI Law.

Aggravating Factors

• The contraventions and non-fulfilment were not brought to the attention of the Commission and are serious.

• Vida has a poor regulatory record going back to 2011, particularly in relation to submitting annual reports and accounts on time.

• There has been a failure to resolve issues to the reasonable satisfaction of the Commission despite an extended period of regulatory involvement. That failure appears to lie largely at Mr Wilson’s door, as the controller, managing director and only constant director throughout the relevant period, as a result of the insufficiency of steps taken by him personally to address the issues.

• Mr Wilson acted as a sole director of a regulated entity since April 2017, with few attempts made to rectify the situation until urged to do so by the Commission.

Mr Alan Michael Chick

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law");

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”);

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended ("the Regulations");

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook"); and

Mr Alan Michael Chick (“Mr Chick”).

On 31 May 2018, the Guernsey Financial Services Commission ("the Commission") decided:

• To impose a financial penalty of £50,000 under section 11D of the Financial Services Commission Law on Mr Chick;

• To make orders under section 17A of the Fiduciaries Law; section 18A of the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002 (as amended); section 28A of the Insurance Business (Bailiwick of Guernsey) Law 1994 (as amended);  section 17A of the Banking Supervision (Bailiwick of Guernsey) Law, 1994 as amended; and section 34E of the Protection of Investors (Bailiwick of Guernsey) Law as amended, prohibiting Mr Chick from performing the functions of director, controller, partner or manager for a period of 5 years;

• The provisions of section 3 (1) (g) of the Fiduciaries Law be disapplied to preclude Mr Chick from holding up to six directorships, which would not otherwise be exempt, by section 3 of the Fiduciaries Law, on the grounds that he is not a fit and proper person to be a director of a company having regard to the Minimum Criteria for Licensing; and

• To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Mr Chick did not satisfy the requirements of the Minimum Criteria for Licensing, pursuant to paragraph 3 of Schedule 1 of the Fiduciaries Law or the relevant requirements of the Minimum Criteria for Licensing under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (as amended); the Insurance Business (Bailiwick of Guernsey) Law, 1994 (as amended); the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (as amended); and the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).

In particular, with reference to Schedule 1 of the Fiduciaries Law, failings have been found in relation to:

• Probity, competence and soundness of judgment: paragraph 3(2)(a);

• Diligence: paragraph 3(2)(b);

• Protecting the clients’ interests; the interests of clients are likely to be threatened by his holding a fiduciary licence or that position:  paragraph 3(2)(c);

• Knowledge and understanding of the legal and professional obligations undertaken: paragraph 3(2)(e);

• Engaged in conduct which reflects discredit on his method of conducting business or suitability to carry on regulated activity: paragraph 3(3)(c); and

• Engaged in business practices or conducted himself in such a way as to cast doubt on his competence and soundness of judgment: paragraph 3(3)(d).

Background

The investigation concerned the conduct of Mr Chick between 1999 and 2015 as a director of a number of companies, certain of which carried on regulated activities under the authority of a licence granted by the Commission under section 6 of the Fiduciaries Law.

Mr Chick was one of the founders of a Guernsey Fiduciary Company (“the Fiduciary Company”), and at all material times, its majority shareholder and controller.  Until 2008 he was the managing director of the Fiduciary Company and from 2008 to 2015 its chairman.  At all material times, he had executive responsibilities with the Fiduciary Company.

Mr Chick also acted as a director of a number of client companies, two of which are pertinent to the matters investigated (“the Client Company(s)”).

The Fiduciary Company is the holding company of a group of companies, which provided financial services under licences granted pursuant to section 6 of the Fiduciaries Law.  Amongst other companies which shared the licence were two trust companies (“the Corporate Trustees”) and a corporate service provider (“the CSP”).  Mr Chick was a director of the Corporate Trustees and CSP.

During the material time Mr Chick was also a director of a Guernsey incorporated company (“Company A”).

Company A’s business is the development and marketing of communication systems.  It is the holding company of a UK subsidiary (“the Subsidiary”).  One of Company A’s functions was to raise monies to lend on to the Subsidiary to enable it to research and develop its telecommunication systems.

Findings

Company A Transactions and Conflicts of Interest

Company A was in the course of researching and developing a communication system.  As such Company A (or the Subsidiary) was not making profits and consistently traded at a loss.  Mr Chick and an associate were at all material times the controllers and directors of Company A.  Mr Chick, and his associate, through another company (“Company B”) advanced substantial amounts by way of loans to Company A.  By 2012, Company A’s liability to Company B amounted to £6,682,125 out of aggregate liabilities of £10,866,466.

Mr Chick informed certain clients (i.e. the ultimate beneficial owners of companies of which he was a director or the beneficiaries of discretionary trusts of which he was a director of the corporate trustee) of the existence of Company A and the possibility of investing in it, which, at all material times, required funding to carry on its research.  In addition to this, at certain times Mr Chick approached some of these clients regarding lending money to Company A.

Mr Chick contends that each of the clients who indirectly invested, or lent monies to Company A, did so with full knowledge that Company A was a research and development company, that each of them conducted their own due diligence into Company A, and then made the decision to invest or lend monies without his involvement.  He also maintained that each client was well aware of his (and that of his associate) interest in Company A.  However, there was little formal contemporaneous evidence recording disclosure of the extent of Mr Chick’s interest in Company A.  What evidence there was had to be deduced from emails and a description of the transaction by Mr Chick and there was little evidence of the extent of the disclosure.

The investments in Company A, made by two client companies (“Client Company 1” and “Client Company  2” or together “the Client Companies”); two employment benefit trusts (“EBT 1” and “EBT 2” or together “the EBTs”) and a Retirement Benefit Scheme (the “FURB”), resulted from Mr Chick’s acquaintance with the beneficial owners of the Client Companies and directors of companies which settled the EBT’s or FURB, who issued directions, or requests, to the Client Companies or to the trustees of the EBT’s or FURB, to make investments, after conducting their own inquiries.

It was accepted by the Commission that in relation to each transaction the investing or loaning party was aware of Mr Chick’s interest in Company A, but unless otherwise stated, only to the extent that he was a director of Company A, along with his close associate who was also a director of the Subsidiary Company.

The Commission found that Mr Chick acted in isolation in all the material aspects of the facilitation of the investments in, and loans to, Company A. In the transactions concerning the Client Companies, the FURB and the EBTs, there are failures on the part of Mr Chick, and these mainly arise from:

a) A failure to document the instructions to him as a director of the Client Companies or Corporate Trustee acting as trustee to the FURB and the EBTs to invest in the shares in Company A or make a loan to Company A;

b) A failure to document evidence recording what the beneficial owners of the Client Companies or the beneficiaries of the FURB or the EBT’s were told about Company A’s performance, or whether Mr Chick’s interest in the company was ever fully disclosed to the extent of his declaration of his interest in Company A’s equity through Company B, or the extent of his financial exposure through Company B;

c) A failure to document how Mr Chick’s conflicts of interest were managed;

d) A failure to properly document the terms and form of any investment or loan;

e) A failure to inform his fellow directors of Client Companies’ and of the Corporate Trustees of his clients’ wishes to invest in, or loan to, Company A; and

f) A failure to convene a board meeting of either of the Client Companies or the Corporate Trustee to consider and to authorise the investments or loans.

Trustee Duties

The actions of Mr Chick meant that the Corporate Trustee did not convene necessary meetings or take decisions in relation to these matters. This meant that the Corporate Trustee was not able to, did not have the opportunity to, and therefore failed to;

• Keep appropriate accounts and records relating to the relevant EBTs and FURB.  Therefore, it did not fulfil the requirements of section 21 of the Trusts (Guernsey) Law, 1989 and section 25 of the Trusts (Guernsey) Law, 2007 in relation to the duty to keep accurate accounts and records.

• Monitor the trusts’ investments or to consider whether to seek repayment of a loan after the expiry of the 6 month loan period.  Mr Chick caused the Corporate Trustee to enter into investments without due consideration by its board and without preparing records of the transactions.  Mr Chick acted alone in arranging the transactions and therefore he should have ensured that proper consideration was given by the board and the proper records were prepared of the transactions. 

Summation on the issues relating to the investment, or loans to, Company A made by clients

A recurring theme of the investments or the loans made by the Client Companies, EBT’s and FURB are:

a) a serious failure by Mr Chick to document matters adequately such as:

i.  The form and extent of his disclosure of his conflict of interest; and

ii.  The form and terms of investment or loans.

b) Mr Chick taking executive decisions without discussing the matters with his fellow directors, whether of the lending Client Companies, or his fellow directors at the Corporate Trustee acting as a trustee in the case of the EBTs and FURB.

In certain cases, particularly that of the EBT 1, the lack of documentation led to the Corporate Trustee facing difficulties in identifying and recovering trust assets from Company A.

These instances highlighted the importance of documentation.  It provides a paper trail of the reasons why the decision to invest was made which might protect the company or directors in the future.  It also ensures that the management of the company are aware of the investment, and it enables successor directors to inform themselves as to the investment.

In the case of the investments by the EBTs and the FURB, Mr Chick’s willingness to accept instructions from persons connected to the Founder or settlor companies, led him to cause the Corporate Trustee to act in breach of trust because he committed the Trustee to investments in, or loans to, Company A without the Trustee discharging its duties as trustee by considering the merits of the investments or loans.  The agreement of a single beneficiary in each of the trusts was insufficient to amount to acquiescence of all the beneficiaries.

Mr Chick’s anxiety to raise funds for Company A was such that it led him to disregard the extent of the Corporate Trustee’s fiduciary duties and the extent to which the Trustee would have had to implement procedures to deal with his conflict.  Those procedures might have led to a delay in implementing the investment or loans or might have resulted in them not being made at all.

Politically Exposed Person Transaction

In 2013 a person (“Mr A”), who had previously been a client of the Fiduciary Company (but that relationship had ceased in 2010), contacted Mr Chick in relation to opening a bank account outside the United Kingdom in relation to the sale of a foreign property.  Mr A was a member of the UK parliament and as such, for money laundering purposes, was categorised as a politically exposed person (“PEP”).

Mr Chick opened an account at a bank on behalf of the Fiduciary Company in respect of Mr A.  The transaction proceeded as planned.  Mr Chick:

a) Did not undertake appropriate enhanced CDD (as required by the Regulations);

b) Did not refer, prepare and document a risk assessment of the proposed transaction (as required by the Fiduciary Company’s internal policy and procedures);

c) Did not refer the matter to the Fiduciary Company’s Risk Committee for approval (as required by the Fiduciary Company’s internal policy and procedures);

d) Did not assign an appropriate risk level to Mr A and the business relationship in order to ensure the identification of any risk factors and the appropriate management of them (as required by the Fiduciary Company’s internal policy and procedures);

e) Did not refer the matter to other senior managers for approval (as required by the Fiduciary Company’s internal policy and procedures);

f) Did not document the considerations of the risk implications associated with the source of funds.  As a result, he caused the Licensed Fiduciary to be in breach of the Rules and its own procedures providing for the creation and retention of documentation.

In failing to refer the transaction to the Fiduciary Company’s Risk Committee, Mr Chick acted in breach of the Regulations and the Fiduciary Company’s internal policy and procedures that were intended to ensure that it complied with the Regulations.

The matters set out above are an example of Mr Chick’s impatience with procedure in circumstances where he had formed a view that a transaction could be implemented, without delay, due to his own knowledge of Mr A.  In doing so, he exposed the Fiduciary Company to sanction for acting in breach of the Regulations and its own procedures.

The Regulations and Rules

The Regulations provide that a financial service business must, prior to the establishment of a business relationship or carrying on an occasional business transaction, undertake a risk assessment of the relationship or occasional transaction and it must have regard to the rules and guidance in the Handbook. 

Regulation 4 provides for customer due diligence, which is to apply to establishing a new relationship and carrying out an occasional transaction.  Those steps include identifying the customer, any person acting on behalf of the customer and information must be obtained in respect of the purpose and intended nature of the business relationship. 

Regulation 5 provides for additional customer due diligence in the case of a business relationship or occasional transaction for a party who is a PEP.  Enhanced customer due diligence means obtaining senior management approval for establishing the relationship or carrying out the occasional transaction, taking reasonable measures to establish the source of any funds and taking such steps as would be appropriate to the business relationship and occasional transaction to understand the purpose and intended nature of each business relationship.  The verification should be carried out before or during the business relationship or before the occasional transaction is carried out. 

Regulation 14 provides that a financial service business shall keep any customer due diligence information for the minimum retention period (in relation to the sale of the property, 5 years from the date the occasional transaction was completed).

The Handbook has been issued (amongst other provisions) pursuant to the Regulation 3(2) of the Regulations to assist financial services businesses to comply with relevant legislation and will be taken into account by the Guernsey courts in considering whether or not a person has complied with relevant legislation.  The Handbook sets out various Commission Rules (“the Rules”).

The consequences of entering into the arrangement with a PEP in accordance with Regulation 5(2)(b) were that the Fiduciary Company had to:

a) Properly identify the PEP in accordance with the requirements of enhanced due diligence and the transaction: Regulation 5;

b) Assess the relationship and the transaction: Rule 43;

c) Ensure that it documented the manner in and basis on which it had assessed the business relationship or the occasional transaction: Rules 59 and 61; and

d) Apply enhanced monitoring to the transaction: Regulation 11 and Rules 274, 276, 277 and 278.  The requirement set out above would apply in the case of the PEP if a matter constituted a new business relationship, a continuing business relationship, or an occasional or one-off transaction.  In the case of a one-off transaction, the enhanced due diligence must be completed prior to the transaction.

Aggravating factors

• The departures from and non-fulfilment of the minimum criteria for licensing were not brought to the attention of the Commission by Mr Chick;

• The contraventions were serious.  They caused a regulated trustee to act in breach of trust, demonstrated a serious lack of diligence in ensuring that appropriate documentation was kept in relation to the actions of a director (companies acting for themselves as well as corporate trustees).  They also caused a corporate trustee to fail to document matters relating to trust assets and demonstrated a lack of competence in the administration of companies’ affairs.  In the case of the PEP, they involve a breach of the Regulations, the Rules, and the Fiduciary Company’s own procedures (including those relating to the opening of bank accounts) which could have exposed it to sanction or jeopardised its license;

• The conduct in relation to the Company A investment or loans was deliberate as it was Mr Chick who took it on himself to implement arrangements when a person acquiesced in an investment or loan to Company A without consulting with his fellow directors or causing the Corporate Trustee to discharge its obligations as a trustee;

• Mr Chick made no effort to rectify the matters complained of which were in the main separate matters which had been continued as opposed to continuing breaches which came to light in 2013 or 2014 and by which time Mr Chick’s executive responsibilities had been restricted.  The failure to cause the Corporate Trustee to monitor investments was a continuing failure and one which Mr Chick wrongly considered could not be performed.

Mitigating Factors

• Save in relation to one EBT where one of the beneficiaries was vociferous in his complaints as to how Mr Chick and the Corporate Trustee had managed matters, there were no complaints as to the investment in Company A by the persons who agreed that they should be made.  However, that is limited mitigation as in the case of the trusts, as there is no evidence that beneficiaries, other than the beneficiary consenting, knew about the investment.  Further, in the case of the beneficiary consenting, there is doubt as to whether they were fully aware of Mr Chick’s conflict of interest.

End

Richmond Fiduciary Group Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (“the Financial Services Commission Law”);

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (“the Fiduciaries Law”);

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended (“the Regulations”);

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (“the Handbook”);

Richmond Fiduciary Group Limited (“the Licensee”)

On 12 April 2018 the Guernsey Financial Services Commission (“the Commission”) decided:

• To impose a financial penalty of £45,500 under section 11D of the Financial Services Commission Law on the Licensee; and

• To make this public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee had failed to ensure compliance with the Regulations, the Handbook, the Code of Practice – Corporate Service Providers, the Code of Practice – Trust Service Providers, Instruction 6 of 2009 and the minimum criteria for licensing set out in Schedule 1 of the Fiduciaries Law.

The Commission notes that, as detailed below, both the level and scope of the sanctions against the Licensee were tempered by the historic nature of the identified failures, the remediation process that was promptly undertaken by the Licensee and the implementation of a new Compliance, Risk and Governance structure following the Commission’s initial visit and presentation of findings.

BACKGROUND

In 1999, the Licensee was established in Guernsey and licensed under the Fiduciaries Law on 1 April 2001.

The Commission conducted an on-site visit to the Licensee between 29 February 2016 and 4 March 2016 (“the 2016 visit”). 

The purpose of the 2016 visit was to carry out a full risk assessment of the Firm.  In doing so the Commission reviewed (among other things) the Firm’s business model, governance, policies and procedures, conduct of business, operational risk, financial crime risk, business risk assessments and a selection of customer files.  

During the 2016 visit and the subsequent investigation, the Commission identified serious instances of governance and operational failings as well as failings in respect of the Licensee’s compliance with applicable Anti Money Laundering / Countering the Financing of Terrorism related regulations.

These concerns fell broadly into the following categories:

1. The Licensee did not always properly verify its underlying customers or identify the risks they posed, in particular regarding high-risk customers, operating high-risk businesses in high-risk countries;

2. The Licensee did not always properly verify the source of wealth and/or the source of funds of its high-risk customers;

3. The Licensee did not always adequately monitor customer relationships and, on occasion, failed to address in a timely manner serious issues that arose during periodic relationship risk reviews;

4. The Licensee failed to maintain adequate records of all its customers;

5. The Licensee failed to comply fully with Instruction 6 of 2009;

6. The Licensee had been warned about the above issues on a number of occasions prior to 2016.  Many of the issues were repeat issues noted from an on-site visit carried out by the Commission in June 2013 onwards, but the Licensee had, in a number of instances, failed to effectively address these shortcomings until undertaking an extensive remediation programme in 2016; and

7. The Licensee failed to comply fully with the minimum criteria for licensing under the Fiduciaries Law.

FINDINGS

The Commission’s investigation found:

The Licensee did not always properly verify its customers

The Licensee failed on a number of occasions to verify from the outset of a business relationship the identity of all parties involved; including relationships involving high-risk business, and politically exposed persons (PEPs).  In the case of one high-risk relationship, both verification of identity and verification of address was outstanding for a period of nearly seven years.

The Licensee placed undue reliance upon formally documented site visits by its senior staff in order to verify high-risk customers’ addresses, without obtaining additional documentation in respect of the relevant addresses.

The Licensee did not always properly identify and verify the source of wealth and/or the source of funds of its high-risk customers

The Licensee was noted on a number of occasions to have entered into business relationships with customers operating high-risk businesses.  In some cases the Licensee placed undue reliance on the assertions being made by customers regarding the source of their wealth or funds, without obtaining supplemental documentary information to support these claims.

The Licensee did not always adequately monitor customer relationships and failed to address in a timely manner all serious issues that arose during periodic relationship risk reviews

The Licensee had amongst its business relationships customers who operated companies whose business activities related to mining or were involved in property dealing.  The Commission noted that in relation to these customers the Licensee:

• had not, in a timely manner, been made aware of a change in the shareholding of a foreign company which owned a company that was administered by the Licensee and which was involved in mining-related activities.  The Licensee failed to adequately document its scrutiny of why the client had failed to notify it of this serious omission.

• had failed to complete financial statements for a company involved in property dealing in the Middle East for nearly ten years; which was exacerbated by the Licensee’s inability to properly identify whether any of these properties had been sold; and

• had failed to maintain contact with a high-risk customer, which resulted in the Licensee being unable to resolve outstanding regulatory issues.

Furthermore, the Licensee was noted in periodic risk reviews to have failed, in some cases, to resolve in a timely manner serious issues that arose during the life of a business relationship.  In one instance involving a high-risk customer, action points regarding customer due diligence (“CDD”) were not resolved by the Licensee and were therefore carried forward to the next review, year after year, for a period of nearly seven years.

The Licensee failed to maintain adequate records of all its customers

The Licensee was noted to have kept inadequate records of many of the customers reviewed by the Commission and as such was unable to perform meaningful periodic risk assessments in respect of those customers.

The Licensee failed to comply fully with Instruction 6 of 2009

In 2009, the Commission issued Instruction Number 6 requiring licensees to review policies, procedures and controls in place in respect of existing customers to ensure that the requirements of regulations 4 and 8 of the Regulations and each of the rules in Chapter 8 of the Handbook were met.  Licensees were required to complete this process by close of business on 31 March 2010 and satisfy themselves that CDD information appropriate to the assessed risk was held in respect of each business relationship.  Where a licensee could not meet the regulations by the deadline they were required to terminate the business relationship. 

The Commission noted during the investigation that the Licensee had three business relationships that had been established prior to 2009, but for whom CDD was still outstanding in 2017, and were in the process of being terminated.

The Licensee failed to effectively address previous regulatory breaches

The Licensee had been warned since 2013, by the Commission and independent compliance consultants, about shortcomings in its compliance with its regulatory requirements.  The 2016 visit and subsequent investigation highlighted that the Licensee had not sufficiently resolved a number of the identified deficiencies. 

As a result, the Commission concluded that prior to 2016 the Licensee had not established and maintained an effective policy for review of its compliance with the Regulations and Handbook, as required by regulation 15 of the Regulations, and rules 27 and 28 as set out in the Handbook.

The Licensee failed to comply fully with the Fiduciaries Law

The Commission concluded that prior to 2016 the Licensee had failed to comply fully with the Fiduciaries Law, specifically paragraphs 1(1)(c), 1(2)(b) and 5(2)(d)(i) of the minimum criteria for licensing set out in Schedule 1 to that Law:

• Business to be carried out in a manner which will not tend to bring the Bailiwick into disrepute as an international finance centre;

• A business shall at all times act in accordance with any rules, codes, guidance, principles and instructions issued by the Commission; and

• Business to be conducted in a prudent manner, with adequate accounting and other records of the business being maintained.

Aggravating factors

The Licensee’s historic compliance deficiencies, as identified by the Commission following the 2016 visit, whilst not systemic, were serious and involved high-risk customers, in high-risk businesses in high-risk countries.

Mitigating factors

The Licensee accepted that there had been historical deficiencies prior to 2016 in the processes, policies, procedures and governance structure that had been in place.  The Commission acknowledges the efforts of the Licensee from January 2016 to implement an extensive remediation programme (which included a review of its client files), which by March 2018 had been substantially completed. 

In particular, the Licensee has significantly strengthened its compliance function, and has expanded its compliance team by over a third in number. 

The Licensee has also completed a restructure and remediation of its governance structure, its policies and procedures and its customer base.

In reaching its decision the Commission recognises that the Licensee engaged an independent consultant in 2016 to develop a comprehensive corporate risk mitigation programme to improve its corporate, operational and compliance functions.  This programme further resulted in a number of changes, including the appointment of a Governance Director with overall responsibility for governance, compliance and risk.

At all times, the directors of the Licensee co-operated fully with the Commission.

The Licensee agreed to settle at an early stage of the process and this has been taken into account by applying a 30% discount in setting the financial penalty.

End

Blenheim Fiduciary Group Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law"); The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”); The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended ("the Regulations"); The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook"); The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008 (“the NRFSB Law”) Blenheim Fiduciary Group Limited, (the "Licensee")

On 25 August 2017 the Guernsey Financial Services Commission ("the Commission") decided:

• To impose a financial penalty of £70,000 under section 11D of the Financial Services Commission Law on the Licensee; and

• To make this public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee had failed to ensure compliance with the Regulations and the Handbook, and Schedule 1 of the Minimum Criteria for Licensing under the Fiduciaries Law.

BACKGROUND

In 1999, the Licensee was established in Guernsey and licensed under the Fiduciaries Law on 14 January 2003.

The Commission conducted an Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) on-site visit to the Licensee between 21 and 25 September 2015 (“the 2015 visit”). 

The purpose of the 2015 visit was to assess the Licensee’s financial crime risks against the Regulations and the Handbook.

The Commission reviewed the policies and procedures, business risk assessment and customer files of the Licensee during the visit.  

The Commission identified serious and systemic AML/CFT failings during the 2015 visit.

These concerns fell broadly into the following categories:

1. The Licensee had been managing and administering three companies that should have been registered under section 2(1) of the NRFSB Law;

2. The Licensee did not properly identify either its underlying customers or identify the risk they pose;

3. The Licensee did not adequately monitor the business it runs on behalf of its customers, including a lack of regular periodic reviews;

4. The Licensee missed obvious “red flags” which should have raised the Licensee’s suspicions, particularly in relation to CDD/AML issues; and

5. Prior to 2015, the Licensee should have been aware of widespread failings in periodic reviews and general client due diligence deficiencies but failed to address these effectively.

On 16 August 2016, pursuant to section 24 of the Fiduciaries Law, the Commission appointed Carter Backer Winter as Inspectors to further investigate the Licensee’s compliance with the relevant laws.

The investigations by the Inspectors and the Enforcement Division identified the following issues:

Failure to Register as Non-Regulated Financial Services Businesses

The Licensee administered three loan companies that should have been registered under the NRFSB Law, but which were not.  The Licensee failed to identify that these loan companies should have been registered until 2014, some six years after the coming into force of the NRFSB Law.  Whilst the Licensee had prior to 2015 disclosed this to the Commission, the current Board accepted that the Licensee had been managing and administering three companies that should have been registered under section 2(1) of the NRFSB Law.

Nature of and monitoring of the business of the loan companies

The loan companies were typically used to make financing available from structures administered by the Licensee to individuals related to those structures.  A number of the loans had defaulted and despite the majority of borrowers being pursued for an update in late 2014, early 2015, the loans remained outstanding.  Prior to being pursued in late 2014, early 2015, the amount of loans in default and the lack of contact led to the Licensee’s own employees considering whether these loans could be considered shams.

The Licensee failed to effectively monitor the business of the loan companies, which was a breach of Regulation 11 of the Regulations.

The Licensee missed obvious “red flags”

A number of files reviewed by the Commission contained obvious money laundering red flags, which should have created suspicion in the mind of the Licensee or at the least been considered in the Licensee’s relationship risk assessment of those clients.  These “red flags” included:

1. An individual who had changed name, nationality and appearance without a clear rationale being given;

2. Trusts with what could be seen as “dummy” settlors; and

3. The appointment of a third party director to a client company without verifying that the individual was suitably qualified for the role; and

4. A company which was treating employee bonuses as loans which the licensee failed to obtain appropriate professional advice upon.

The Licensee failed to establish or take into account the purpose and intended nature of the client’s business relationship when undertaking a risk assessment. This resulted in breaches of Rule 56 of the Handbook and Regulation 4(3)(e) of the Regulations.

The Licensee did not properly identify and verify its customers

The Licensee’s own remediation plan which sought to identify those verification subjects whose customer due diligence (“CDD”) was not up to current standards,  showed that at the commencement of the remediation, of over 2,000 verification subjects, more than half required remedial work to bring them up to today’s standards. 

The Licensee itself noted that it did not have CDD, or had incomplete CDD, on some borrowers within the loan companies.  In addition, no or incomplete CDD was held on the “dummy” settlors, who prior to the introduction of the Regulations and Handbook had established trusts with a nominal settlement.

The majority of the Licensee’s clients were taken on prior to the coming into force of the Regulations and Handbook.  However, in accordance with Regulation 4 of the Regulations, CDD for business relationships existing at the time of the coming into force of the Regulations, where it is not held already, must be obtained at appropriate times on a risk-sensitive basis.

In 2009, the Commission issued Instruction Number 6 requiring licensees to review policies, procedures and controls in place in respect of existing customers to ensure that the requirements of Regulations 4 and 8 of the Regulations and each of the Rules in Chapter 8 of the Handbook were met. In accordance with the Commission’s Instruction Number 6, licensees were required to complete this process by close of business on 31 March 2010 in order that licensees satisfy themselves that CDD information appropriate to the assessed risk is held in respect of each business relationship.

The Licensee should have been aware of widespread failings prior to 2015

Prior to 2015, the Licensee should have been aware of widespread failings in its CDD processes and in particular in its regular reviews of relationship risk assessments.  The backlog of risk assessment reviews was noted by a compliance consultant engaged by the Licensee in 2012 and by the Commission following a visit in 2013.  The remediation put in place by the Licensee following the 2013 visit did not resolve the issues and the review of risk assessments was still an issue in 2015.

Failure by the Licensee to regularly review relationship risk assessments was a breach of Regulation 3(2)(b).  Failure by the Licensee to ensure effective action was taken, prior to 2015, to resolve the identified deficiencies was a breach of Rule 28 of the Handbook.  As a result, the Commission concluded that the Licensee prior to 2015 had not established and maintained an effective policy for review of its compliance with the Regulations and Handbook, as required by Regulation 15 of the Regulations.  

Aggravating Factors

The Licensee’s historic compliance deficiencies, as identified by the Commission following the 2015 visit, were serious, systemic, and had an adverse effect on the Licensee’s business.  The fact that remediation has taken more than 18 months and with the commitment of substantial resources by the Licensee is an indication of the scale of the issues and deficiencies that have had to be addressed, as a result of the previous failings.

Mitigating Factors

The Licensee accepted that there had been historical deficiencies prior to 2015 in the processes, policies and procedures that had been in place.  The Commission acknowledges the efforts of the Licensee from January 2015 to implement an extensive remediation programme, which by January 2017 had been substantially completed.  In particular, the Licensee has gone through a substantial overhaul of its compliance policies and procedures to improve the deficiencies that were identified.

The Licensee has completed the restructure of the policies and procedures, and an extensive remediation exercise on case files.   They have exited or are in the process of exiting approximately 60 percent of the client base either for commercial reasons or due to the adoption of a less aggressive/lower risk business profile.

At all times, the directors of the Licensee co-operated fully with the Commission and the Inspectors and in reaching its decision the Commission recognises that the Licensee has put in place a comprehensive AML/CFT Risk Mitigation Programme to address the risks identified by the Commission, as well as to review more broadly the Licensee's compliance arrangements.

The Licensee agreed to settle at an early stage of the process and this has been taken into account by applying a 30% discount in setting the financial penalty.

Capital Solutions Limited, Stillwater Worldwide Limited, Stillwater Investment Enterprise Limited, Philip Anthony John Montague, Terence Joseph Scullion, David John de Carteret

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law");
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended ("the Protection of Investors Law");
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciaries Law");
The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended ("the Banking Law");
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Managers and Insurance Intermediaries Law");
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Business Law") - (together "the Regulatory Laws")

Capital Solutions Limited
Stillwater Worldwide Limited
Stillwater Investment Enterprise Limited

Philip Anthony John Montague (“Mr Montague”)
Terence Joseph Scullion (“Mr Scullion”)
David John De Carteret (“Mr De Carteret”)
(together “the directors”)

On 14 June 2017 the Guernsey Financial Services Commission (“the Commission”) decided:

  • To impose a financial penalty of £35,000 on Mr Montague under Section 11D of the Financial Services Commission Law;

  • To impose a financial penalty of £21,000 on Mr Scullion under Section 11D of the Financial Services Commission Law;

  • To impose a financial penalty of £10,500 on Mr De Carteret under Section 11D of the Financial Services Commission Law;

  • To make orders under the Regulatory Laws prohibiting Mr Montague from performing any function in relation to business carried on by any entity licensed under the Regulatory Laws for a period of 7 years;

  • To make orders under the Regulatory Laws prohibiting Mr Scullion from performing any function in relation to business carried on by any entity licensed under the Regulatory Laws for a period of 5 years;

  • To make orders under the Regulatory Laws prohibiting Mr De Carteret from performing any function in relation to business carried on by any entity licensed under the Regulatory Laws for a period of 3 years and 6 months;

  • To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect to Mr Montague for 7 years, Mr Scullion for 5 years and Mr De Carteret for 3 years and 6 months;

  • To issue this public statement under section 11C of the Financial Services Commission Law.

Were it not for the fact that Capital Solutions Limited is insolvent, a financial penalty would have been imposed on Capital Solutions Limited under Section 11D of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Capital Solutions Limited and the directors were found not to be fit and proper persons in accordance with the Minimum Criteria for Licensing contained in Schedule 4 to the Protection of Investors Law, and Schedule 4 of the Insurance Managers and Insurance Intermediaries Law.

BACKGROUND

In September 2015, the Commission’s investigation initially examined the conduct of two overseas companies, Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited, who acted as the sub investment advisor and promoter to two funds (“the funds”) of a Guernsey protected cell company’s authorised collective investment scheme, (a controlled investment business), between 2009 and 2015. The investigation then widened to examine a Guernsey based entity, namely, Capital Solutions Limited.

The Investigation examined the following issues:

  1. whether Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited were in breach of section 1 of the Protection of Investors Law, in that they had carried on a controlled investment business in the Bailiwick without a licence; and

  2. whether Capital Solutions Limited, Mr Montague, Mr De Carteret and Mr Scullion had failed to act in accordance with the minimum criteria for licensing pursuant to Schedule 4 of the Protection of Investors Law and Schedule 4 of the Insurance Managers and Insurance Intermediaries Law, including failure to comply with relevant rules and codes, such as:
    •  The Licensees (Conduct of Business) Rules 2009; and

    • The Finance Sector Code of Corporate Governance 2011.

Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited were jointly owned by Mr Montague and another individual, both of whom purported to be their directors.

Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited operated from the Capital Solutions Limited offices. Capital Solutions Limited was a Guernsey incorporated entity, licensed to carry on controlled investment business under the Protection of Investors Law and act as an insurance intermediary under theInsurance Managers and Insurance Intermediaries Law.

Whilst holding themselves out as directors of Stillwater Worldwide Limited both Mr Montague and his associate advised the fund to make a substantial investment to a Special Purpose Vehicle in another jurisdiction, and then in turn his associate instructed that these monies be loaned to the another structure for which both Mr Montague and his associate had an ultimate beneficial ownership in. Mr Montague had no part in this transaction that we have been able to identify.

Mr Montague was the controller of Capital Solutions Limited and its director since its incorporation in 2002 until his resignation in December 2015.

Mr Scullion was a controller of Capital Solutions Limited and had been the director since December 2008 until present day.

Mr De Carteret was the non-executive director of Capital Solutions Limited from November 2007 until the present day.

To assist with the investigations carried out by the Commission information was sought from their regulatory partners in the British Virgin Islands, Gibraltar, British Columbia and the Isle of Man, in order to obtain relevant evidential material as appropriate.

Findings

The Commission’s investigation found:

Capital Solutions Limited

Capital Solutions Limited failed to organise and control its internal affairs in a reasonable manner, retain company records for a period of at least a 6 year period and lacked knowledge and understanding of its legal and professional obligations. This is evidenced by:

  • Capital Solutions Limited failed to keep adequate records in relation to client agreements when providing advice to its clients, or the suitability for investments into the funds. The Commission therefore, amongst other things, was unable to draw a conclusion as to the quality, relevance and independence of the advice provided by Capital Solutions Limited to its clients;

  • Capital Solutions Limited failed to ensure the retention and access to company records after a dispute with its IT service provider. This meant Capital Solutions Limited had significant gaps in their company records and were unable to provide certain information to the Commission for examination; and
     
  • Capital Solutions Limited failed to retain its company records which were in the possession of Mr Montague after his resignation as its director, nor made any substantive efforts to ensure that the documentation was returned.

  • Mr Montague and an associate set up Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited, whilst Capital Solutions Limited was perceived as their regulatory face in Guernsey, failing to confirm the most basic of requirements on whether:

    •  it required a licence to conduct the type of business they intended it to do; and

    • they were actually named directors of these companies. 
  • Mr Montague and his associate thus conducted unlicensed business for a number of years.
     
  • Mr Montague, Mr Scullion and Mr De Carteret, as directors of Capital Solutions Limited, demonstrated complete incompetence in their roles.  Corporate governance procedures were treated with contempt, and client data was either lost, or retained by a departing director (Mr Montague);
     
  • Capital Solutions Limited, Mr Montague, Mr Scullion and Mr De Carteret thus failed to act in accordance with the minimum criteria for licensing pursuant to Schedule 4 of the Protection of Investors Law; The Licensees (Conduct of Business) Rules 2009 and; The Finance Sector Code of Corporate Governance 2011.

Mr Montague

Mr Montague demonstrated a serious lack of competence, soundness of judgement and knowledge and understanding of his legal and professional responsibilities whilst involved with Stillwater Worldwide Limited, Stillwater Investment Enterprise Limited and Capital Solutions Limited. This is evidenced by:

  • Between March 2009 and August 2010 Mr Montague was the controller and purported director of Stillwater Worldwide Limited. During this period Stillwater Worldwide Limited was acting as promoter and sub-investment advisor to the funds. In August 2010 Stillwater Worldwide Limited’s role was novated to Stillwater Investment Enterprise Limited. Stillwater Investment Enterprise Limited continued to act as sub investment advisor and promoter to the funds until September 2015. Between March 2009 to September 2015 Mr Montague alongside his fellow director signed agreements on behalf of Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited whilst purporting to be their directors;
     
  • The Commission has identified that Stillwater Worldwide Limited and Stillwater Investment Enterprise Limited were never licensed to engage in the restricted activities of advising and promoting for a collective investment scheme and therefore were doing so without a license;
     
  • Neither Mr Montague nor his fellow director were ever directors of Stillwater Worldwide Limited and were not directors of Stillwater Investment Enterprise Limited until July 2013; and
     
  • Mr Montague resigned from Capital Solutions Limited in December 2015 and retained a substantial amount of Capital Solutions Limited’s company records on a personal electronic device. This significantly affected the safe and effective ongoing operation of Capital Solutions Limited.

Mr Scullion and Mr De Carteret

Mr Scullion and Mr De Carteret showed a serious lack of competence, soundness of judgement and knowledge and understanding of their legal and professional responsibilities whilst directors of Capital Solutions Limited. This is evidenced by:

  • Mr Scullion whilst acting as a financial advisor at Capital Solutions Limited failed to keep any substantive documentation surrounding the advice he was providing to clients. Amongst other issues this raises, it has prevented the Commission from assessing Mr Scullion’s conduct when providing advice to his clients;
     
  • Mr Scullion and Mr De Carteret failed to adequately comprehend the significance of the retention of Capital Solutions Limited’s company records by Mr Montague after he resigned. With the retention of these records no effective and planned approach to remediating the issue of the loss was considered or instigated. Mr Scullion and Mr De Carteret failed to consider potential operational risks for Capital Solutions Limited, including inter alia, reputational risk, business continuity risk and legal risk should data be used for nefarious reasons or the potential for breaching data protection;
     
  • Mr Scullion and Mr De Carteret failed to understand the seriousness of the dispute with Capital Solutions Limited’s IT service provider which resulted in a significant loss of Capital Solutions Limited’s company records. The loss was not identified until a number of years after the fact when the Commission made requests for certain Capital Solutions Limited documentation;
     
  • Neither Mr De Carteret nor Mr Scullion provided any effective challenge to Mr Montague at board level, with Mr Montague dominating meetings. Board packs were never produced, minutes were never signed nor reviewed in a timely manner.

Mitigating Factors

At all times, the Directors have co-operated fully with the Commission and have agreed to settle prior to the matter being referred to a decision maker. As such, a discount of 30 percent has been applied to their penalties.

Capital Solutions Limited is no longer licensed by the Commission and Mr Scullion and Mr De Carteret have conducted an orderly wind down of the company.

Marlborough Trust Company Limited, Marlborough Nominees Limited, Mr Nicholas Robert Hannah, Mr Adrian Bradley Howe, Mr David Charles Enevoldsen, Mr Benjamin John Tustin

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors etc (Bailiwick of Guernsey) Law 2000 (“the Fiduciaries Law”)
The Protection of Investors (Bailiwick of Guernsey) Law, 1987
The Banking Supervision (Bailiwick of Guernsey) Law, 1994
The Insurance Business (Bailiwick of Guernsey) Law, 2002
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (collectively “the Regulatory Laws”)

Marlborough Trust Company Limited (“MTCL) and Marlborough Nominees Limited (“MNL”) (together the “Licensees”)

Mr Nicholas Robert Hannah (“Mr Hannah”)
Mr Adrian Bradley Howe (“Mr Howe”)
Mr David Charles Enevoldsen (“Mr Enevoldsen")
Mr Benjamin John Tustin (“Mr Tustin”) (collectively “the Directors”)

 

On 21 November 2016 the Guernsey Financial Services Commission ("the Commission") decided:

  • To impose a financial penalty of £100,000 on MTCL under Section 11D of the Financial Services Commission Law;
  • To impose a financial penalty of £35,000 on each of Mr Hannah and Mr Howe under Section 11D of the Financial Services Commission Law (had it not been for their financial means these fines would have been £50,000 in each case);
  • To impose a financial penalty of £25,000 on Mr Enevoldsen under Section 11D of the Financial Services Commission Law;
  • To impose a financial penalty of £10,000 on Mr Tustin under Section 11D of the Financial Services Commission Law;
  • To make orders under the Regulatory Laws prohibiting Mr Hannah and Mr Howe from performing the functions of director, controller, partner or manager in relation to business carried on by an entity licensed under the Regulatory Laws for a period of 5 years;
  • To make an order under the Regulatory Laws prohibiting Mr Enevoldsen from performing the functions of director, controller, partner or manager in relation to business carried on by an entity licensed under the Regulatory Laws for a period of two years and six months ;
  • To disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of Mr Hannah and Mr Howe for five years, Mr Enevoldsen for two years and six months and in respect of Mr Tustin for two years;
  • To serve notices of objection under Section 15 of the Fiduciaries Law to Mr Hannah and Mr Howe objecting to Mr Hannah and Mr Howe remaining controllers of MTCL;
  • To impose a condition on the licence of MTCL under Section 9 of the Fiduciaries Law requiring the removal of Mr Hannah and Mr Howe as controllers of the Licensee and the removal of Mr Hannah, Mr Enevoldsen and Mr Howe as directors of MTCL; and
  • To issue this Public Statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that MTCL’s and the Directors’ management and administration of asset holding companies (“the SPVs”) wholly owned by a Guernsey closed ended investment fund, Arch Guernsey ICC Limited (“the ICC”, together with its incorporated cells, “the Fund”), exhibited serious breaches of the minimum licensing criteria for licensing.  Furthermore their activities do discredit to the professionalism with which Guernsey’s fiduciary sector is generally regarded.    Each individual who served as Director during that time, and the roles each of them played is reflected in the level of sanctions levied against each of them.

The conduct that was criticised throughout the investigation was serious.  There was a complete failure to lay down and record responsibilities at MTCL and MNL board level and by the individual directors to ensure that any delegated powers were properly monitored and controlled.  There was a complete abdication of responsibility at SPV Board level.  The backdating of records and creation of false board minutes was deliberate, knowing and in relation to significant matters.  The failure to have in place written advisory agreements was serious given the key importance of them to the investment activity carried on by the SPVs in question.  All these failings were systemic and widespread as regards the SPVs. The false answers given to the Commission were at the very least made recklessly. The failure to report to the Commission and to carry out a timely and full review was serious given (a) the publicity and size of the Arch cru debacle; (b) the faults and failings which have emerged. The matter is exacerbated by the large numbers of retail investors whose interests MTCL and MNL were ultimately in charge of. These matters also impact on the reputation of Guernsey as a centre of financial services provision.

BACKGROUND

The Fund

The sanctions and measures imposed in this case, flow from an investigation by the Commission into the Licensee, undertaken after the collapse of the Fund. Although the collapse of the Fund brought about the investigation, the Commission does not suggest that the conduct of the Licensee and its Directors, who are criticised in this case, had any causal link to that collapse.

The Fund was incorporated in Guernsey as an incorporated cell company on 21 December 2006. It was a closed-ended investment company. At its largest, the Fund had 26 incorporated cells (“the ICs”).

The Relationship between the Fund and the Licensee

One of the ICs, Arch Treasury IC Limited, operated as a treasury vehicle through which the Fund channelled certain investments in which a number of ICs participated. These investments were structured so that the ICs owned SPVs, which were mainly asset holding companies ultimately owned by the Fund structure.

In or about August 2007, Arch FP approached the Licensee to provide corporate services to the SPVs – principally those services were to form the companies, act as nominee shareholder of the companies for the ICs, provide directors to the SPVs and administer the SPVs. MTCL ultimately acted for 23 of the SPVs owned by the Fund.

The persons provided to the SPVs to act as their directors were the MTCL itself and one of its joint licensees, MNL.

The administration services provided by MTCL to the SPVs included covering the company secretarial function and recordkeeping in relation to maintaining the statutory and administrative records of client companies, and those companies’ correspondence records, bank statements and financial information.

The Fund was structured in such a way that it was MCTL who was ultimately responsible for decisions over investment of the Fund’s underlying assets held by the SPVs.

The assets held in the SPVs fell into three broad categories:

i)          Real estate properties for rental or re-sale following refurbishment; 

ii)         Fine wine for long term investment and secondary sales;

iii)        Shareholdings in a company which owned other companies invested in ships.

Background to the Licensee

The Licensee is licensed under the Fiduciaries Law, and also the POI Law to carry out administration of category 1 investments: collective investment schemes. On 4 May 2005, this POI licence was extended to include category 2 investments: general securities and derivatives. 

Mr Hannah was MTCL’s managing director between January 2004 and his resignation on 11 September 2011. After that date, he continued and continues to serve as director. Mr Enevoldsen, previously director of administration, was appointed managing director in Mr Hannah’s place.

Mr Howe, who was largely responsible for business development, resigned from the boards of MTCL and five of the joint licenses at the same time as Mr Hannah in September 2011. He continues to act as the alternate director to Mr Hannah. On 9 January 2014 MTCL notified the Commission that it wished to re-appoint Mr Howe as a director of MTCL and the other joint licensees responsible for the MTCL business from which he had resigned.

Mr Tustin resigned as a director of MTCL with effect from 16 August 2013. Mr Tustin ceased employment with MTCL on 10 October 2013.

The directors of MNL were, at the relevant time, Messrs Hannah, Howe, Enevoldsen and Tustin.

As at 1 December 2012, Mr Hannah was a director of 705 client corporate companies. As a natural person director of a corporate director he was involved on the boards of a further 156 companies. As at 30 June 2013, the number of personally held directorships held by Mr Hannah had grown to 1,405. A significant number of Mr Hannah’s directorships relate to a fractional property ownership scheme that MTCL administered. By the end of August 2014, the number of personal directorships he had, had fallen to 82.

As at 1 December 2012, Messrs Howe, Enevoldsen and Tustin were each directors of some 35 to 37 companies. As the natural person director of the corporate director they were each involved on the boards of a further 35 to 36 companies. Mr Tustin relinquished his directorships when he ceased employment at MTCL.

Facts of the Case - Record Keeping and Corporate Governance

MTCL provided services to the ICs by (among other things) acting as nominee shareholder of the incorporated SPVs, or some of them, and in acting as director of the SPVs and providing its related company MNL as the other director.

There was no record anywhere in the available board minutes of MTCL of a decision of its board to act in relation to the ICs, as shareholder or director. The same applies as regards MNL. Furthermore, and as regards their respective roles as director, there was no record in the board minutes of either company, of any relevant decision as director of any of the SPVs, including any decision to appoint natural persons to act on its behalf at any board meetings of the SPVs. From the perspective of good corporate governance, that authorisation should have been properly made and properly documented. It was not.

The person with primary responsibility is said to have been the person who “in the ordinary course would attend and participate in board meetings of the underlying company.” This did not explain or deal with the position of the person who purported to act for the other joint licensee director. It was said that on occasions where it was “impossible or impracticable for the individual allocated general responsibility for the business in question to participate in board meetings of the underlying companies, another of the natural person directors of the relevant licensee would participate.” This in effect meant that, not only might the person with primary responsibility for the line of business not attend the board meeting of the SPV in question but the decision as to how to vote or make a determination as director of the SPV would, in such circumstances, be taken by another. In effect, the decision making process at all levels was only recorded at the SPV level. The records of the purported board meetings of the underlying SPV companies indicated that the natural persons who acted for MTCL and MNL at board meetings varied considerably and on at least one occasion encompassed persons who were not natural person directors of MTCL or MNL.

To the extent that the boards of MTCL and MNL delegated decision making to specific persons there was no record of any delegation and no record of any overall supervision and control of this delegated function by the respective boards of MTCL and MNL. The directors’ submissions made clear that there was no such supervision and control. Mr Tustin, asserted in his submissions there was no need for him to play any role in supervising and controlling the relevant Arch area of business or the role played by his co-directors. Furthermore, the explanation given, whereby directors or employees could stand in as representatives of MTCL or MNL at board meetings of SPV companies shows that those persons might have no real understanding of the decisions they were implementing acting as natural person representatives of the directors of the underlying SPV companies. Mr Tustin signed crucial documents in relation to Anchor Limited. However, his case is that he was unaware of any failings of MTCL to properly consider investment recommendations put forward to it as director of SPVs or of any failure in record keeping and documentation regarding the conduct of the businesses of the SPVs and that he was not actively involved in the administration of the SPVs. He did however play a role in that respect.

Mr Tustin’s case is that he was unaware that any investment decision making responsibility “devolved” to MTCL. Instead his case is that his understanding was that the role of MTCL and MNL as directors was simply to carry out the instructions of “their shareholder” and that all actions as directors would be ratified by the shareholder. However, the legal shareholders of most of the SPVs were in fact MTCL and MNL. More significantly, a stated case that MTCL and MNL as directors of the SPVs were at the time to operate on the basis that they were simply to exercise no discretion as directors over major investment decisions and instead were to surrender their discretion and delegate their decision making powers to the ultimate beneficial owner, when that was no-where recorded nor apparently was even a matter to be discussed at board level of those companies but simply something that was “understood” from the flexible operations in place, demonstrates the failure of corporate governance, proper exercise of directors’ duties and record keeping at MTCL/MNL board level.

Savile Fine Wine Investments Limited (“SFWI”)

Savile Fine Wine Investments Limited (“SFWI”) was incorporated on 30 November 2007 and was a SPV. Its directors at all material times were MTCL and MNL. During the relevant period while MTCL was involved, SFWI was “advised” by Arch FP or Baron Fine Goods Limited (“Baron”) with regard to investment decisions in relation to wine purchases and sales. Baron was incorporated sometime in 2008 by Arch FP. For most wine purchases SFWI was invoiced for the purchases by Baron.

The Directors knowledge of wine and use of independent information

One of the reasons cited by the directors of MTCL as to why Arch FP identified MTCL to act for the ICs’ asset holding companies was because of MTCL’s expertise in managing investments in real property. However, MTCL, MNL and the directors of MTCL had little expertise in relation to wine investment, which was highlighted when each of the directors was spoken to.

On 18 June 2013, the Commission asked MTCL whether any of its administrators had had access to a wine price index in the course of their work between 2007 and 2009. In its response MTCL considered this function to be the remit of the relevant investment advisor(s).

MTCL and MNL and their respective directors did not meaningfully consider any recommendations made to them by any advisor. There was no meaningful independent decision making or review of the “advice” tendered to it, by the board of SFWI in relation to wine investment decisions made by it.

In circumstances where the directors of MTCL and MNL themselves had little or no knowledge of the wine investment market, the intention was formally to appoint an adviser to SFWI. However in the MTCL timesheet entry of 27 November 2008,  almost a year after SFWI was incorporated, no written advisory agreements were in place between SFWI and either Arch FP or Baron.  When the Commission asked MTCL to confirm that no investment advisory agreement was in place between SFWI and Baron prior to 27 November 2008 and MTCL agreed that there was not although attempts had been made to obtain one.

The natural person directors of MTCL and MNL did not have the experience or expertise to take decisions over wine investment. Nor was such expertise otherwise available within MTCL and MNL.

Mr Howe’s explanation of how directors’ decisions about wine were reached placed reliance on an index that MTCL did not have access or subscribe to nor was it one which the administrators at MTCL would check any recommendation against. In the circumstances there was no evidence that the directors of MTCL (and therefore MTCL itself as director of SFWI) received recommendations and then did, or were able, to check them in any meaningful way before acting upon them. The investment recommendations in some instances were simply a Robert Parker rating of quality and its price. Messrs Hannah and Tustin effectively accepted this.

There were also a number of board minutes that were created after the event which did not record actual meetings of the board. There should, instead, have been records of meetings of the board ratifying transactions entered into.

Anchor Limited: Joint venture with Marine Technologies Holdings Corporation through Nautical Ventures inc.

Background and the structure

In an email sent by Arch FP to MTCL, Arch FP envisaged a new strategic investment arrangement involving investment in a Marshall Islands incorporated company, Nautical Ventures Inc. (“Nautical Ventures”), investing, through wholly owned SPVs (“Owner SPVs”), in ships. Arch’s investment was proposed as being a 50% shareholding in Nautical Ventures, held through a “nominee SPV’ - i.e. the Arch nominee SPV company would act as a nominee shareholder in the joint venture company, Nautical Ventures. In due course the nominee SPV became the company called Anchor Limited.

Anchor Limited (‘Anchor’) was incorporated on 20 February 2008. Its directors were MTCL and MNL; both of these companies were also the shareholders of Anchor as nominees for and on behalf of Arch Treasury IC Limited (“AT1”), an unlisted incorporated cell of the Fund. The ships that were acquired required conversion or refurbishment.

Nautical Ventures itself came to own a number of subsidiary Owner SPVs. Each Owner SPV owned a ship registered in the Marshall Islands: four ships had been purchased in 2007; another one was purchased on or about 9 April 2008 and another was purchased on or about 7 May 2008. The Owner SPVs were all wholly owned by Nautical Ventures other than Saint Mary Shipping Corporation. In the latter case Nautical Ventures owned a large proportion of the shares of the Owner SPV.

Minutes record that on 9 April 2008, the board of Anchor, comprising Mr Enevoldsen representing MTCL and Mr Howe representing MNL, approved a number of documents relating to this joint venture. In particular a number of written resolutions of the directors and shareholders of Nautical Ventures were tabled and approved for execution.

In its letter to the Commission, dated 19 July 2013, MTCL stated amongst other things that it had been unable to find any investment advisory agreement for Anchor. The Senior Decision Maker in reaching his decision took these answers to mean that no final investment plan was provided to Anchor (or MTCL) to approve or even to operate by; no final version of any technical agreement was ever produced to MTCL/Anchor, so that there was no ability to oversee such agreement and that no investment advisory agreement was entered into for Anchor which therefore operated much in the same way as SFWI in this respect.

The Directors' Knowledge of Shipping

Mr Hannah described the relevant experience that he and his co-directors had of shipping as ‘extremely limited’.

Mr Howe stated that he thought that neither he nor his fellow directors had any expertise in shipping.

Mr Tustin described his knowledge of the commercial shipping market as ‘virtually none’.

Mr Howe had been asked what he meant by, in a note of a meeting held on 17 January 2008, that “Marine Technology will send over individual business plans for the purchase of a ship which will be retained on file and not vetoed therefore accepted”.

In effect this was made after a meeting held by Mr Howe in the UK and in effect once Anchor had been established the board would not have been vetoing anything that was proposed to it.  Mr Howe admitted that his colleagues were “not very happy with it” (the contents of the note).

In its submissions to the Commission, MTCL stated that this note had not been formally tabled, but that an ‘informal discussion was undertaken between relevant directors and employees of MTC’. The identities of the parties to this discussion were not revealed; nor has any note of such discussion and its conclusion been made available. The Senior Decision Maker therefore inferred that there had never been such a note.

Mr Hannah, Mr Enevoldsen and Mr Tustin stated that they had been unaware of any note until they were spoken to by the Commission. The note does not show that MTCL had any concerns over an arrangement under which it would, as director (and with MNL the board), abdicate its responsibilities, relinquish control and allow other parties to direct what Anchor should do. There is no contemporary documentation which suggests that MTCL considered refusing the purchase of ships when this was suggested by Arch FP or that it meaningfully considered and approved such purchases or the acquisition of the shares in the relevant Owner SPVs. There was no certainty at MTCL as to the ships that had been purchased and what sort of ships they actually were.

In reality no-one at MTCL had any sufficient expertise to be in a position to come to a considered view that a “veto” could or should be deployed.

The Commission was not satisfied on the balance of probabilities that there was any intentional scheme to mislead relevant authorities, or anyone else, as to whether management of Anchor and associated matters was carried on from Guernsey. However, the evidence did assist in confirming its view that in practice no meaningful independent judgment was exercised by MTCL and MNL as directors of Anchor (or when acting as or for directors of any of the subsidiary companies of Nautical Ventures).

MTCL’s lack of knowledge about the types of vessels held within the structure of Nautical Ventures’ year end, and of Anchor’s appointment as corporate director of a number SPVs owned by Nautical Ventures, and the absence of relevant board minutes dealing with the latter point, confirms the absence of meaningful management role played by MTCL and MNL as directors of Anchor (and of Anchor as itself a director).

As was the case regarding SFWI, neither MTCL nor MNL (being provided to Anchor to act as corporate directors) nor their respective natural directors had the experience or expertise, in this case shipping matters, to take relevant investment decisions regarding transactions involving shipping. The contractual arrangements for this multi- million pound venture were never finalised as evidenced by the outstanding schedules. In effect, Anchor was expected to act as a “nominee” director and did in fact do so as shown in its consideration of the financing arrangements for the joint venture. This was epitomised by the fact that MTCL did not know what type of vessels had been acquired with a loan facility of US$200 million.

The Property SPVs

Arch Real Estate Limited (“AREL”) was intended to advise the real property holding SPVs owned by the ICs. AREL was incorporated on 24 October 2007.

On 20 December 2007, in relation to a transfer request relating to Savile ML1 Ltd, a formal advisory agreement was not yet in place between that real property asset holding SPV and AREL, and that the agreement was awaited from a firm of UK lawyers. In fact it appeared that no advisory agreements were then in place between AREL and any of the property holding SPVs.

On 16 January 2008, MTCL emailed a spread sheet of ‘agreement dates’ to AREL and scanned copies of the signed pages of the agreements. There was evidence provided to the Commission to suggest that there was some backdating of agreements taking place.

There was no evidence to indicate that the execution of these agreements took place after a board meeting to consider the agreements and determine whether to execute them. The timesheets indicated that minutes recording the decisions to enter into the agreements were not prepared until 15 February 2008, which was most likely to refer to the drafting of a minute. MTCL had further stated that an internal review on 15 February 2008 noted that there were no minutes to record approval of the agreements and so minutes were drafted which reflected approval at purported meetings which took place on the commencement date of each agreement. MTCL now accept that the minutes erroneously recorded the commencement date of the agreements. It has stated that it recognises that the proper course would have been to have held meetings to consider and ratify entering into those agreements to take effect from their commencement dates.

In the circumstances:

i)          On any view, 17 agreements dated on their face on various dates in 2007 were in fact incorrectly dated and backdated. The signatories were Mr Howe and Mr Hannah. The dates on the agreements were in each case consciously so dated: the dates on the agreements contain manuscript amendment.

ii)         11 were dated on a date prior to incorporation of the counter party to the SPV. That had the potential to raise issues as to its validity and/or effect.

iii)        When the agreements were signed, no board meetings were held. Instead some time later false board minutes were prepared showing meetings happening approving the agreements on the dates on which they were respectively dated. These were each signed by Mr Hannah.

The Directors’ Role and Conduct

The directors MTCL provided to the companies gave no meaningful consideration to proposed investments recommended by the investment adviser.  This included investments relating to wine and shipping over which the directors’ knowledge and experience was negligible.  In relation to the wine asset holding company, recommendations were often made by the adviser and approved by the Board of the SPV within minutes of the recommendation having been made without any due consideration on whether this was a good investment for the Fund or not.

The Licensee and the Directors were prepared to enter into arrangements with the investment adviser to create the false impression that management and control rested with the Licensee, and that the Boards of the asset holding companies were meaningfully engaged in the decision-making process over the companies’ assets when, in reality they were being told what to do by the adviser or an associated company of the adviser. 

In relation to the asset holding company investing in wine, Mr Howe met with the Fund’s investment adviser and a note following that meeting referred to the directors of the wine asset holding company needing to review recommendations and would no doubt decline some of them.  The Commission established that there was an arrangement whereby the advisors would occasionally suggest that they would send some deals for consideration with a phone call first to say that this is a deal the adviser has looked at, and it is not one that the asset holding company would want to consider, thereby giving the false impression that meaningful consideration and due process had taken place in Guernsey by the directors of that company provided by the licensee. 

It was clear that the 8 July 2008 letters to shareholders were back-dated, because the timesheet entry of 15 September 2008 refers to drafting such a letter. The Commission accepted that the parties had agreed to make the effective date of change of ownership as from 7 July 2008 but the documentation should reflect the correct dates upon which they were created and in the case of minutes record accurately when meetings occurred. Where an event precedes a meeting of a board, the proper course is for the directors to consider ratifying those actions and for minutes of meetings to be created which accurately record any such ratification.

The Commission also concluded, from MTCL’s timesheets and a fax from the Designated Manager, that between 1 July 2008 and 31 December 2008, MTCL backdated minutes of board meetings to 7 and 8 July 2008, the loan notes and declarations of trusts (dating them to 7 July 2008) all pertaining to the restructuring of equity and debt of six SPVs managed and administered by MTCL.

Various descriptions of the process for taking and recording decisions of client boards were given to the Commission but the description which was most plausible was that of Mr Enevoldsen. He asserted that minutes were generally prepared in draft form prior to board meetings and this was corroborated by other staff members and the time sheets. He also claimed that staff would generally not be present at a meeting for the purpose of recording what was discussed and subsequently producing minutes, although they might be called in if something was unclear and the directors might amend draft minutes. This was also supported by comments made by staff members.

The Commission did  not consider that there was anything in itself wrong with draft minutes being prepared in advance of a meeting to act as an aide memoire for the conduct of the meeting and, in effect, a form of agenda. Obviously, if the draft minute was simply “approved” or “signed” with no discussion or consideration of the matters set out in the draft minutes, then the position would not be satisfactory. However in reaching its decision, it was not satisfied, on the balance of probabilities, that this latter course was adopted on any particular occasion or that it more generally reflected the practice at MTCL/MNL at the relevant time.

For example, there was the evidence of, Mr Tustin with regard to inaccurate minutes when dealing with minutes of one of the property owning SPVs in September 2007. The minute of the meeting recorded a meeting at which Mr Hannah and Mr Tustin were recorded as present but the minute was signed by Mr Howe. The transaction was the major one of the acquisition of the property then held by the SPV at a cost of some £2.2.million.

False information/statement by MTCL

Mr Hannah had been asked about missing investment advisory agreements regarding other SPVs, and about the quality of recordkeeping at MTCL. He was asked whether the issues explored regarding absence of agreements might arise in connection with other SPVs and said he would like to think not. 

In a letter dated 21 August 2013 from MTCL to the Commission, signed by Mr Hannah, director of MTCL, MTCL falsely stated that seventeen asset holding companies managed and administered by MTCL had entered ‘Property Investment Advisory Agreements’ with AREL on dates between 28 August 2007 and 10 December 2007.

The dates at which these agreements were said to have been signed were incorrect. The agreements had been back dated and signed by the natural person directors of the corporate directors MTCL and MNL. The minutes recording decisions to enter into these agreements had also been back-dated too.

These points are now essentially accepted by MTCL.

An internal review the following month then identified that the decisions had not been minuted. MTCL states that there was no intention to mislead. In all the circumstances, including the accompanying falsified minutes and agreements, these representations by MTCL in 2013 were not true. Furthermore, and in the circumstances, the Commission considers that they were made without due care.

False information/ statement by Nicholas Hannah

Mr Hannah made a number of false claims to the Commission. In particular:

i)          His initial description of the process whereby board meetings were minuted either by a secretary in attendance or, in the absence of a secretary, by the directors recording matters and relaying them to an administrator after the meeting was inaccurate: minutes were generally drafted in advance.

ii)         As appears from above, Mr Hannah, who is known to have signed a number of backdated minutes of board meetings in circumstances where he must have known that there had been no meeting declared at interview that to the best of his knowledge, he was ‘absolutely certain’ that minutes indicated that there had been a meeting.

iii)        He signed the letter, dated 21 August 2013 from MTCL to the Commission, in response to a Notice requesting information under section 23 of the Fiduciaries Law, which contained false statements.

False information/statement by Adrian Howe

Mr Howe, when spoken to, falsely stated that, in order to take decisions about wine investments, the directors of SFWI made use of a price index to which MTCL had access. Mr Howe knew that this statement was false or he was dishonestly reckless as to its veracity.

On his behalf it is submitted that if the indices did not exist he would not have referred to them. The Commission did not accept this. The mere fact that such indices exist was not strong evidence that the evidence given by Mr Howe about the use in fact made of the indices was correct.

Mr Howe also falsely stated that a note he had written on 17 January 2008, envisaging that Anchor would accept recommendations of ship purchases by Marine Technologies Holdings Corporation, had been reviewed by the board of MTCL, which they had been uncomfortable about, with the effect that Arch FP changed the nature of its arrangement with MTCL in relation to Anchor. Mr Howe knew that the statement about the board reviewing the note was false.

Mr Howe also falsely stated that minutes of board meetings were not drafted prior to board meetings. As set out above, this is untrue. Mr Howe must have known this statement was false or been reckless as to its truth.

Co-operation with regulatory authorities

Under principle 8 of the CSP Code and principle 10 of the Principles of Conduct of Finance Business regarding co-operation with the regulator and relations with the Commission respectively, licensees are expected to deal openly and co-operatively with the Commission and keep it informed promptly of anything concerning the financial institution which might reasonably be expected to be disclosed to it.

Whilst there is a list of matters that the Commission would expect to be notified of, as explained in the guidance underpinning this principle, that list is not exhaustive. The Commission would expect a licensed fiduciary to use its judgement as to what matters it should inform its regulator about.

When the then UK Financial Services Authority (“UK FSA”) suspended the UK Arch Cru funds in March 2009, significant adverse publicity over the management and administration of the fund’s ultimate assets, such as the ships, was generated.

Publicity about the collapse escalated through 2010 and 2011 and led to the UK FSA launching, in June 2011, a compensation scheme for Arch Cru investors. By November 2011, an All-Party Parliamentary Group on the Arch Cru Investment Scheme had been established with the aim of achieving the maximum possible compensation for individual investors who have been affected by the collapse.

Whilst none of this publicity identified MTCL’s involvement, during this time MTCL made no approach to the Commission to notify it of its involvement in the management and administration of the Fund’s assets nor did this publicity trigger any internal review by MTCL into its role in relation to its management and administration of these companies underlying the Fund.

The Commission first approached MTCL about its relationship with the Fund on 21 February 2012 when it issued a notice under section 23 of the Fiduciaries Law.

The Commission expects licensees to engage openly with the Commission and report matters of significance about their business of which they consider the Commission should be informed.

MTCL had nearly three years from when the problems on the Fund first emerged to the Commission’s first notice issued under section 23 of the Fiduciaries Law to act. From the manner with which MTCL has responded to the Commission in writing, and when the directors have been spoken to, the Commission came to the conclusion that MTCL and its directors have failed to act promptly and with diligence in investigating MTCL’s performance in relation to the Arch Cru SPVs and in co-operating and informing the Commission in terms of full, frank and accurate answers to the questions sought.

AGGRAVATING FACTORS

MTCL was managing and administering asset holding companies owned by a fund which ultimately had a large retail investor base. The invested sums were considerable in size.

As regards Mr Hannah and Mr Howe, their co-operation in attending for interview as a mitigating factor, has to be balanced against the finding that in certain respects they gave false answers in interview.

MITIGATING FACTORS

No specific losses have been identified as flowing from the conduct criticised in this case.

MTCL no longer provides corporate services to the underlying asset holding companies of the Fund.

MTCL submitted documents and information requested under the section 23 notices issued on 21 February 2012 (as amended on 23 March 2012) and 6 November 2012 within the timeframes stipulated.

The Directors and staff of MTCL agreed to the Commission’s request to attend for interview.

MTCL was entitled to draw comfort from the fact that there were other parties to the Fund structure which were regulated to provide financial services in the UK and Guernsey.

MTCL has participated in a mediation process between various parties connected to legal proceedings being brought to recover losses by the Fund.

MTCL was frank in making certain admissions to the Commission for example, in its letter of 19 July 2013 that it had not been “made privy to the final versions” of the schedules to the shareholders’ agreement between Anchor Limited and Marine Technologies Holdings Limited and its letter of 21 August 2013 to the Commission that there was no investment advisory agreement for Savile Fine Wine Investments Limited.

Although the failures in relation to the Arch SPVs was widespread and serious, the assumption must be that the failings do not extend to the other parts of the sizeable business carried on by MTCL (and MNL) at the same time or thereafter. 

END

Louvre Fund Services Limited, Kevin Paul Gilligan, Charles Peter Gervais Tracy

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended (“the Financial Services Commission Law”)
The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the “POI Law”)

Louvre Fund Services Limited – (“Louvre”)

Mr Kevin Paul Gilligan– Executive Director (“Mr Gilligan”)
Mr Charles Peter Gervais Tracy - Executive Director (“Mr Tracy”)
(together “the Directors”)
 
On 16 September 2016 the Guernsey Financial Services Commission ("the Commission") decided:
 
• to impose a financial penalty of £42,000 under Section 11D of the Financial Services Commission Law on Louvre;
 
• to impose financial penalties of £24,500 and £10,500 on Mr Gilligan and Mr Tracy respectively under Section 11D of the Financial Services Commission Law;
 
• to make this public statement under Section 11C of the Financial Services Commission Law.
 
The Commission considered it reasonable and necessary to make these decisions having concluded that Louvre and the Directors failed to act in accordance with the minimum criteria for licensing contained in Schedule 4 to the POI Law.
 
BACKGROUND
 
The background to these decisions is as follows.
 
Louvre took over as the designated administrator of an authorised collective investment scheme (“the Fund”) in August 2013.  The Fund was a protected cell company with three cells.  Mr Gilligan is the Managing Director of Louvre and was a director of the Fund between October 2013 until September 2015 and Mr Tracy is the Chairman and Compliance Officer of Louvre. 
 
FINDINGS
 
Following an investigation into the Fund and Louvre, the Commission found:

Louvre

• Louvre demonstrated a lack of understanding of the risk profile of the Fund and the Fund’s main underlying investment;
 
• Louvre had a number of concerns regarding the Fund but allowed the Fund to continue pre-existing actions that had a dubious benefit to investors.  For example Louvre:
  • permitted a 20% audit hold-back without understanding the reasons for the hold-back; and
  • allowed inter-cell loans to continue despite having concerns about the legitimacy of the loans;
• Despite having a number of concerns and recognising that the Fund presented a high risk to Louvre, it failed to implement enhanced compliance procedures to manage the risk of the Fund;
 
• Despite the concerns of Louvre, it did not inform the Commission of any of these concerns.
 
• As a result, the Commission concluded that Louvre did not administer the Fund with the appropriate soundness of judgement and diligence.

Mr Gilligan

•  Mr Gilligan failed to demonstrate he acted with diligence, experience and soundness of judgement in relation to the Fund.  For example, Mr Gilligan:
  • was unable to explain why the Fund was applying a 20% audit hold-back; and
  • did not give sufficient thought as to the benefit to the investors of inter-cell lending or the detriment to the cell, and ultimately investors, of the repayment of the loans with illiquid assets.
• The Commission formed the view that due to his level of experience, Mr Gilligan was unable to withstand the pressures put on him by the promotor of the Fund, who had a significant amount of control over the Fund. As a result, Mr Gilligan found himself in a position in which he has had to change stance on a number of matters;
 
• Mr Gilligan’s conduct contributed to Louvre’s failure to administer the Fund appropriately.

Mr Tracy

• Mr Tracy failed to demonstrate he acted with diligence and soundness of judgement in relation to his role as Louvre’s Compliance Officer.  Mr Tracy had a significant role in ensuring compliance standards were satisfied.  Mr Tracy failed to ensure that enhanced compliance procedures were undertaken to manage the identified risks of the Fund and despite being aware of a number of concerns regarding the Fund;
 
• Despite the concerns of Louvre and himself, Mr Tracy did not inform the Commission;
 
• Mr Tracy’s conduct contributed to Louvre’s failure to administer the Fund appropriately.

MITIGATING FACTORS

Louvre recognises that there were issues with its compliance obligations and have taken steps to remediate these issues.  This includes a review of their compliance processes and a number of changes to their policies and procedures have been made as a result of the review, including the proposed appointment of a new Compliance Officer.
 
Efforts were made to remedy some of Louvre’s concerns.
 
Mr Gilligan resigned as a director of the Fund in September 2015.
 
At all times Louvre and the Directors co-operated fully with the Commission.  Louvre and the Directors agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalties.

Bordeaux Services (Guernsey) Limited, Peter Gordon Radford, Neal Anthony Meader, Geoffrey Robert Tostevin

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended ("the Protection of Investors Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciaries Law")
The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended ("the Banking Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Managers and Insurance Intermediaries Law")
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Business Law") (together "the Regulatory Laws")


Bordeaux Services (Guernsey) Limited ("Bordeaux")

Peter Gordon Radford
Neal Anthony Meader
Geoffrey Robert Tostevin

AMENDED PUBLIC STATEMENT

On 28 July 2015, the Commission decided:

1. To impose a financial penalty of £150,000 on Bordeaux under section 11D of the Financial Services Commission Law;

2. To impose a financial penalty of £50,000 on Mr Radford under section 11D of the Financial Services Commission Law;

3. To impose a financial penalty of £30,000 on Mr Meader under section 11D of the Financial Services Commission Law;

4. To impose a financial penalty of £30,000 on Mr Tostevin under section 11D of the Financial Services Commission Law;

5. To make orders under the Regulatory Laws prohibiting Mr Radford, Mr Meader and Mr Tostevin (together "the Bordeaux Directors") for a period of five years from becoming or continuing to hold the function of controller, partner, director or manager in relation to business carried on by an entity licensed under the Regulatory Laws;

6. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Radford, Mr Meader and Mr Tostevin.

7. To issue a Public Statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, necessary and proportionate to make this decision and impose these penalties having concluded that Bordeaux and the Bordeaux Directors failed to fulfil the criteria in Schedule 4 of the Protection of Investors Law.

The Bordeaux Directors failed to ensure Bordeaux carried on its business with appropriate systems to enable it to function properly and as a result it did not act with prudence nor exercise professional skill appropriate to the nature and scale of its activities.

The Bordeaux Directors demonstrated a consistent and serious lack of appropriate competence, judgement and diligence. Their conduct demonstrated a lack of understanding and attention to the legal obligations of Bordeaux. These failings suggest that the interests of investors and the reputation of the Bailiwick as a financial centre are, or are likely, to be jeopardised by their holding a position of director, controller, partner or manager of a licensee in the immediate future.

Subsequently, on 11 May 2016, the Royal Court set aside the penalty of £150,000 imposed on Bordeaux Services (Guernsey) Limited and the prohibition order of 5 years imposed on Mr Tostevin and ordered the Commission to reconsider both matters. The Commission has reconsidered the matters as ordered by the Royal Court and decided: -

• To impose a financial penalty of £100,000 on Bordeaux under section 11D of the Financial Services Commission Law;

• To make orders under the Protection of Investors Law and the Fiduciaries Law prohibiting Mr Tostevin for a period of two years commencing 31 July 2015 from becoming or continuing to hold the function of controller, partner, director or manager in relation to business carried on by an entity licensed under the Protection of Investors Law and the Fiduciaries Law

• To issue a revised Public Statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, necessary and proportionate to make this decision in the light of the comments of the Royal Court in its decision.

BACKGROUND

Bordeaux is licensed under the Protection of Investors Law and the Fiduciaries Law.

During the period 1 January 2007 to 31 December 2009 ("the Relevant Period"), Bordeaux was the Designated Manager and Administrator of Arch Guernsey ICC Limited, now known as SPL Guernsey ICC Limited ("the ICC") and its incorporated cells ("the ICs"). The ICs owned special purpose vehicles ("SPVs"), which held assets ultimately owned by the fund structure. At its largest, the ICC had 26 ICs, the majority of which were listed on the Channel Island Stock Exchange ("CISX"). The ICC and the ICs are referred to collectively as "the Fund".

The Bordeaux Directors were at all material times the directors, the ultimate beneficial owners and the controllers of Bordeaux. Mr Radford and Mr Meader were also directors of the Fund. Mr Tostevin was the Compliance Officer at Bordeaux between 2000 and 2003 and again between August 2007 and January 2010.

Two United Kingdom Open-Ended Investment Companies, CF Arch Cru Investment Funds and CF Arch Cru Diversified Funds ("the UK OEICs"), whose Investment Manager was Arch Financial Products LLP ("Arch FP"), invested a significant proportion of their scheme property into the ICs of the Fund. Over 2007 and 2008 total investments in the Fund approximated £595 million.

On 13 March 2009 operation of the UK OEICs was suspended by the UK Financial Services Authority over liquidity concerns following increased redemptions.

On 21 December 2010, the Fund's consolidated net asset value was calculated at £234 million, this represented a significant loss to investors.

FINDINGS

Conflicts of interest

Any properly organised entity operating a business of financial services should ensure that there were procedures for dealing with conflicts of interest. Bordeaux should have done so and the Bordeaux Directors should have ensured that it did. It is no answer to this criticism to rely upon the Articles of Association or any Investment Management Agreement. There was no evidence that the Bordeaux Directors managed a conflict of interest appropriately within the Fund structure.

In failing to put in place and implement procedures for dealing with conflicts of interest Bordeaux acted in breach of paragraph 2(1) of Schedule 4 of the Protection of Investors Law under which Bordeaux was required to carry on business with prudence and integrity and with professional skill appropriate to the nature and scale of its activities.

Calculation of net asset values and their notification to CISX

The Fund's Scheme Particulars and the IC Particulars state that the IC's Directors had delegated the responsibility for the determination of the net asset value ("NAV") to the Administrator, i.e. Bordeaux. Bordeaux was required to calculate the IC's NAV on a monthly basis and to notify CISX of the prices as soon as practicable after calculation.

During 2008 the timetable for the production of NAVs by Bordeaux slipped and NAVs for the end of March 2008 were finalised on 31 July 2008, an interval of four months from the required date of completion. Correspondence between Bordeaux and Arch FP stated that Bordeaux had resourcing issues and were looking to add to those resources to speed up the production of the NAVs. There were further delays in 2009.

As a result of the delay in producing NAVs during 2008 and 2009 investors and potential investors were not given up to date information on which to base their decisions. Furthermore, as most of the ICs were listed on CISX, this could have led to the creation of a false market as independent investors would have dealt, or considered dealing, on indicative sale prices that were not properly reflective of NAV, but the Investment Manager who was undertaking inter-cellular trades would have been aware of a more accurate, up to date, value of the ICs.

The Fund's auditors also referred to a delay to valuations for 31 March 2009 which were not finalised until September 2009 and identified substantial weaknesses in the Fund's records for which Bordeaux was responsible.

The delays appear to be in part attributable to failures of Bordeaux to organise its business with the appropriate degree of diligence and professionalism in breach of paragraphs 1(1)(b), 2(1)(a) and 2(1)(b) of the Protection of Investors Law.

NAV Methodology

The listed ICs acquired significant assets in the form of loan notes, many of which were issued by the IC Arch Treasury IC Limited ("AT1"). The terms of these varied but many included a coupon with a fixed rate of interest. Many were asset backed, for example by ships, or were otherwise related to assets held either by the investing IC or by AT1. Many effectively permitted the borrower to defer the payment of the coupon for a period of time (i.e. to capitalise the interest).

Prior to October 2008, Bordeaux valued these loan notes at "par plus accruals". Thus, in effect, from one month to the next, in calculating an IC's NAV, where that IC held a loan note, Bordeaux increased the NAV by the income due that month, irrespective of whether that income had been paid, and irrespective of any change in the risk of the investment, such as a change in the value of the underlying asset upon which the note was secured. The increase in NAV by the income due in the month may be an appropriate method of valuation but it does require the valuer to investigate the underlying asset from time to time.

The NAVs at the end of February 2009 were significantly higher than the NAVs as at the end of March and April 2009, much of which was attributable to the overvalued loan notes. The substantial fall in the NAVs of the ICs that occurred subsequent to the suspension of the Fund and the appointment of a new administrator may demonstrate the inaccuracy of the pricing up to that point.

There is no evidence that Bordeaux or Mr Radford and Mr Meader, as Fund Directors, raised issues with the Investment Manager as to the performance of the Fund in comparison to other funds within the same sector during the Relevant Period when it would have been prudent to undertake such a comparison or raised any questions in respect of the valuations or the method of valuation.

There were no adequate procedures in place at Bordeaux for the valuation of unlisted securities in the Fund and Bordeaux was totally reliant on the Investment Manager to provide such valuations. In a compelled interview, Mr Radford was asked what valuation methodologies Bordeaux was employing for non-quoted assets, Mr Radford replied, "we didn't discuss non-quoted assets."

The answer above is consistent with Bordeaux relying entirely upon Arch FP in relation to illiquid assets; albeit it might have been entitled to rely on Arch FP to provide valuations it should have taken steps to understand the methodology employed and put in place a procedure to check on the valuations produced by Arch FP. Failure to understand valuations placed on unquoted assets by Arch FP resulted in Arch FP being unsupervised in relation to the provision of valuations of unlisted securities.

Compliance with Fund Documentation

On several occasions, requests for the release of funds to the SPVs comprised of no more than a one side of A4 letter faxed to Bordeaux. The request would then be forwarded to the custodian, sometimes within a very short period of time of receipt of the fax, suggesting that little or no analysis of the request had taken place. No evidence was provided to demonstrate that any subsequent analysis or review of the transactions had taken place by Bordeaux.

It was apparent that Bordeaux did not have adequate procedures in place relating to the making of payments. These functions were not adequately understood by staff resulting in a gap surrounding the review of payments contributing to a failure to ensure compliance with the Fund's documentation and to protect the interests of investors.

From 15 December 2008, Bordeaux, as Designated Manager and Administrator of the Fund, was required by Rule 2.01(c) of the Authorised Closed Ended Investment Scheme Rules, 2008 ("the ACEIS Rules") to administer the Fund in accordance with the most recently published information particulars.

Whilst there were no transactions undertaken by the Fund following the implementation of the ACEIS Rules, it appears that during the Relevant Period Bordeaux had failed to monitor investments made by Arch FP to ensure that the Fund was administered in accordance with the scheme documents, this continued until the eventual suspension of the Fund in July 2009.

The failure to monitor whether investments complied with the scheme particulars manifested a lack of competence and soundness of judgement, diligence and prudence and appropriate professional skill.

Record Keeping

Principle 9 of the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules, 1998 ("the FNCC Rules"), the rules in force during the Relevant Period, required a licensee to organise and control its internal affairs in a responsible manner, keeping proper records, and where the firm employs staff or is responsible for the conduct of investment business by others, should have adequate arrangements to ensure that they are suitable, adequately trained and properly supervised and that it has well defined compliance procedures.

Rule 5.02 of the FNCC Rules required Bordeaux to have in place record keeping procedures and keep records for five years. The Commission found that original documents relating to the Fund were not kept in Guernsey; transaction documents were missing for up to a year and a half.

Bordeaux's level of control or oversight over the role of the Investment Manager was significantly reduced by not maintaining or having sight of original documentation. The Commission saw no evidence that Bordeaux took steps to ensure that the Investment Manager provided Bordeaux with all original documentation. It is noteworthy that Bordeaux's requests for original documents to the Investment Manager did not take place until the Commission had requested sight of the documentation.

Payment of Fees

A large proportion of the Fund's trading was between ICs. This included multiple instances of a listed IC subscribing into another IC's offering of shares. The explanation put forward by Arch FP for the inter-cellular trading was that it was more advantageous to investors to cross invest rather than leaving cash in an IC. As a result of inter-cellular trading between ICs, significant fees were generated for the benefit of the Investment Manager.

The IC Particulars state that Arch FP would be paid a 2% initial charge for any subscription money received and a 1.5% - 2% management fee based upon the NAV (to be amortised over a five year period). The net effect of cross trading was not only a payment to the Investment Manager based on the amount subscribed from one IC to another but an overall increase in the NAV of the investing IC. This resulted in increased subscription and management fees payable to Arch FP.

Whilst at all material times Bordeaux was aware of the transactions being entered into on behalf of the ICs, albeit after the event, the structure of these transactions and the fees being taken by Arch FP, any enquiry by Bordeaux was limited and insufficient. Bordeaux should have ensured that procedures were in place to prevent the fees being charged or paid as opposed to having to recover the fees after they have been paid.

Board Minutes

As company secretary to the Fund, one of Bordeaux's responsibilities was to create and maintain minutes of meetings of the Fund boards. A review of the minutes kept by Bordeaux has shown that they are perfunctory in their nature considering the number and depth of issues discussed.

Minutes should be an accurate and clear record of the discussion and decisions made at a meeting. Mr Meader understood that the corporate secretarial department of Bordeaux was "very poor". This should have prompted the Bordeaux Directors to take action to remediate this failing. During the Relevant Period, the board was responsible for ensuring compliance with Principle 9 of the FNCC Rules which states that a licensee should be controlled and organised in a responsible manner so as to keep proper records, it is clear that this was not the case with Bordeaux.

Mr Meader confirmed during a compelled interview that Bordeaux used template minutes for meetings in relation to listing of cells on the CISX rather than minuting the discussion that had taken place. There is no evidence that Mr Meader, as a director of Bordeaux, queried or challenged this procedure for drafting minutes ahead of meetings. Mr Tostevin was not aware that minutes were being produced in respect of meetings that had not taken place.

As a result of the failure, the records of the company would not have been accurate and complete and represented a misleading record of affairs. The conduct of the Board of Bordeaux demonstrates a failure to understand the requirement to keep full, proper and not misleading records in respect of the controlled investment business undertaken.

Deficiencies in Bordeaux's Compliance Function

Rule 5.01(5) of the FNCC Rules required a licensee to appoint a compliance officer in Guernsey to be responsible for compliance. Rule 5.01(3)(b) required a licensee to review its written compliance procedures at least annually and to ensure that its employees are at all times aware of the current procedures.

The compliance monitoring programme of Bordeaux during the relevant period was deficient and no serious attempt was made to improve it. Bordeaux did not ensure that its compliance officer, or any member of staff or director of Bordeaux, from the date of licensing until 2012 had the relevant experience or qualifications to fulfil the role.

Mr Tostevin estimated that he spent 10-15% of his time on compliance matters during his tenure as compliance officer, with the remainder of his time being taken up by IT and accountancy tasks. Mr Tostevin also explained to the Commission in an interview that he did not consider that the role of a compliance officer, or his role as a director of Bordeaux, included a responsibility to assess the status of Bordeaux's internal rules and procedures against the changing external regulatory environment.

It is apparent that there was no clear delineation of responsibility for ensuring Bordeaux complied with external regulatory changes. Mr Tostevin conceded that to his knowledge no individual had checked Bordeaux's internal documents for continued compliance with the external regulatory scheme between the time of the creation of the documents in 2006 or 2007 and the end of the Relevant Period.
As a result, Bordeaux's procedures were not updated to reflect the important changes brought about by the introduction of the ACEIS Rules following the amendment of the Protection of Investors Law to bring closed ended schemes with the remit of that law. The Fund became an authorised closed ended fund as it was grandfathered through the transitional provisions of those rules therefore this was particularly pertinent to Bordeaux.

The compliance monitoring programme did not identify any of the issues that have been identified above. The programme should have revealed that conflicts of interest were not being mitigated or managed, that the Fund was not being administered in accordance with the Scheme Particulars, that there were not adequate record keeping procedures in place and other such breaches as identified within this Public Statement.

Mr Radford signed a letter to the Fund's auditors certifying that the Fund was complying with the laws and regulations dated 15 December 2009 when he was in no position to do so, as evidenced above. Bordeaux did not have sufficient compliance procedures in place to be able to conclude that there were no issues of non-compliance. As a result, the auditor may have been materially misled as to the true position of the scheme.

Client Take On Procedures

Prior to the launch of the Fund, Bordeaux had not had a relationship with Arch FP. Arch FP had not previously managed a Guernsey closed ended scheme. Arch FP was taken on as a new client on or around November 2006. Bordeaux's relationship with Arch FP was not subject to any new client take-on procedures.

Although Arch FP was authorised and regulated by the Financial Services Authority, Bordeaux should have taken appropriate steps to monitor Arch FP, particularly as they were a new client to Bordeaux and Arch FP had not previously managed a Guernsey closed-ended fund before. Bordeaux should have ensured that appropriate client take-on procedures were in place to identify potential risks with new business. Failure to do so was (amongst other matters) a failure to fulfil paragraph 3(2)(f) of schedule 1 to the Fiduciary Law. It also showed a failure to act with the appropriate level of skill and competence and diligence.

Anti-Money Laundering Awareness

Bordeaux did not have relevant or effective sanctions training during the Relevant Period. Mr Radford confirmed that the sanctions training at Bordeaux did not cover the types of considerations raised by the nature of investments invested in by Arch FP, such as a ship, which may be hired or chartered by a party subject to a sanction.

This is a breach of Rule 351 of the Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook") which requires financial services businesses to consult the full list of financial sanctions targets on the sanctions committee list. Investments in the Fund were multi-jurisdictional and assets held by, or for the Fund, may have been chartered by Iranian companies and there is no evidence that the financial sanctions targets were reviewed at any time or consideration as to the potential breach of UN, EU or Guernsey sanctions had been undertaken.

Staff Training Deficiencies at Bordeaux

There was insufficient staff training undertaken at Bordeaux during the Relevant Period, with the result that some staff did not possess adequate knowledge or skills to fulfil their duties.

No external book-keeping, accounts or valuation training was given to the staff member responsible for the Fund's book-keeping. All that the staff member received was in-house training for posting securities and book-keeping. The member of staff received no training relating specifically to closed-ended funds, again only in-house instruction was provided.

The member of staff also confirmed that she did not receive any formal compliance training or training on conflicts of interest.

Paragraph 5(3)(a) of schedule 4 to the Protection of Investors Law requires the Commission to consider whether a licensee has staff of adequate number, skills, knowledge and experience to undertake and fulfil their duties. From the review undertaken by the Commission it would appear that Bordeaux failed to ensure that staff were adequately trained or experienced and as a result this criteria was not satisfied.

AGGRAVATING FACTORS

Although the Investment Manager was authorised by the FSA, Bordeaux should have undertaken appropriate due diligence and on-going monitoring of the Investment Manager particularly as Arch FP had not been previously known to Bordeaux and the Investment Manager had not previously managed a closed-ended collective investment scheme in any jurisdiction.

Bordeaux was aware and paid "structuring fees" to Arch FP regarding shipping transactions without adequate questioning of the purpose of the shipping transactions.

The Bordeaux Directors were aware of the fees taken by AT1 regarding shipping transactions despite the fact that AT1 was owned by Arch FP, the Directors of Bordeaux did not question the validity of these fee payments.
The Bordeaux Directors failed at all material times to consider the conflicts of interest arising from the ownership of AT1 in entering into transactions with the ICs.

The issues identified indicate a systemic and serious weakness of the management systems and internal controls within Bordeaux, throughout the Relevant Period and more recently.

The Commission has received a number of complaints from investors in the UK OEICs and their MPs.

The Bailiwick of Guernsey as a reputable finance centre has been put at risk by the adverse media attention.

Bordeaux had been subject to heightened supervision by the Commission.

Bordeaux requested an extension to the first request for information and documents under section 27 of the Protection of Investors Law after 5pm the day before the submission was originally due to the Commission.

On 5 August 2013, Bordeaux's legal advisor notified the Commission that there were approximately 75,000 further documents which have not yet been reviewed in order to determine whether they are responsive to the Commission's Notice dated 24 January 2012. The failure to review these documents and submit them to the Commission, if relevant to the investigation and as part of the section 27 Notice served upon them, is a breach of the Protection of Investors Law.

The failure by Bordeaux to identify the additional 75,000 documents also calls into question whether the record keeping procedures utilised by Bordeaux are in compliance with section 6.1.4 of the Licensees (Conduct of Business) Rules, 2009.

MITIGATING FACTORS

Bordeaux no longer acts as the Designated Manager and Administrator of the Fund.

Bordeaux did not double charge its administration fee on the cross investments therefore it did not gain monetarily from the inter-cellular trading.

Bordeaux was entitled to place a degree of reliance upon the FSA authority conferred upon the Investment Manager and a degree of reliance on the Commission who confirmed that it would accept an application from Arch FP as a new promoter having undertaken its own due diligence.

The Directors and staff of Bordeaux attended the Commission's offices when required to do so for interview.

There is no allegation of dishonesty against Bordeaux or the Bordeaux Directors.

Guernsey Insurance Brokers Ltd, Mr Richard Julian Wickins and Mr David John Merrien

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended ("the Protection of Investors Law")
T
he Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended ("the Banking Law")The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciaries Law")
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Business Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Managers and Insurance Intermediaries Law")

Guernsey Insurance Brokers Limited

Mr Richard Julian Wickins
Mr David John Merrien

AMENDED PUBLIC STATEMENT

On 3 December 2014, the Commission decided:

1. To impose a financial penalty of £8,000 on Guernsey Insurance Brokers Limited ("GIBL") under section 11D of the Financial Services Commission Law.

2. To impose a financial penalty of £8,000 on Mr Richard Julian Wickins ("Mr Wickins") under section 11D of the Financial Services Commission Law.

3. ...

4. To impose the following conditions on the licence held by GIBL under section 7 of the Insurance Managers and Insurance Intermediaries Law:

a. That within three months of the date of the imposition of these conditions, GIBL is to make such appointment or appointments as may be required so that it has at least two directors apart from Mr Wickins, both directors to be acceptable to the Commission, and GIBL is not thereafter to permit the number of its directors to fall below three;

b. That within 18 months of the date of the imposition of these conditions, Mr Wickins is to achieve the Certificate in Company Direction or Accelerated Certificate in Company Direction offered by the Institute of Directors in the UK, or an equivalent qualification in corporate governance acceptable to and agreed in advance in writing by the Commission, and is to deliver to the Commission evidence that he has achieved the said qualification;

c. That unless Mr Wickins achieves the qualification to which the previous paragraph refers by 31 July 2016, Mr Wickins is not to act as a director of GIBL unless and until he does achieve such qualification and has delivered to the Commission written evidence that he has achieved it.

5. To make orders under the Regulatory Laws prohibiting Mr Merrien from performing any function in relation to business carried on by an entity licensed under the Regulatory Laws.

6. To disapply the exemption set out in section 3(1)(g) of the Fiduciary Law in respect of Mr Merrien.

7. To make orders under the Protection of Investors Law, the Insurance Managers and Insurance Intermediaries Law and the Insurance Business Law prohibiting Mr Wickins from performing any function in relation to controlled investment business, any function in relation to an insurance intermediary conducting long-term insurance business and from performing the functions of controller, partner, director or manager in relation to a person licensed under the Insurance Business Law to conduct long-term insurance business.

8. To make a Public Statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, necessary and proportionate to make this decision and impose these sanctions and penalties having concluded that Mr Merrien is not a fit and proper person to perform any function in relation to regulated business in the Bailiwick of Guernsey. The Commission's independent Senior Decision Maker found that Mr Merrien had failed to appreciate or properly to advise clients of GIBL of risks in connection with an investment into which they were persuaded to switch part of their pension funds, that he 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. The contraventions by Mr Merrien as an Authorised Insurance Representative were very serious, and were exacerbated by his failures to deal openly and cooperatively with the Commission in the course of its investigation or to accept responsibility for what he has done.

The Commission also concluded that GIBL and Mr Wickins had failed in material respects to fulfil the minimum criteria for licensing set out in Schedule 4 of the Protection of Investors Law and the Insurance Managers and Insurance Intermediaries Law, and that Mr Wickins should not perform any function in relation to controlled investment or long-term insurance business. There was no criticism of Mr Wickins in connection with general insurance business.
Financial Penalties

The financial penalties imposed on Mr Wickins and GIBL reflect a 20% discount because they accepted the sanctions proposed to be imposed on them within 7 days of the notice issued by the Commission's Senior Decision Maker indicating the sanctions he was minded to impose.

The Commission considers that the contraventions by Mr Merrien, 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 the Enforcement Proceedings, were very serious and would, taken in isolation and without having regard to the matters the Commission is required to take into account under section 11D(2)(e) of the Financial Services Commission Law, attract a significant financial penalty within the statutory maximum of £200,000.

Following an appeal by Mr Merrien to the Royal Court in which judgment handed down in private on 25 September 2015 and published on 9 June 2016 (David John Merrien v Cees Schrauwers (Chairman of the Financial Services Commission), Judgment 23/2016), and the Commission's subsequent appeal to the Guernsey Court of Appeal against parts of the Royal Court's judgment in which judgment was handed down by the Court of Appeal in private on 17 March 2016 and published on 9 June 2016 (Cees Schrauwers (Chairman of the Financial Services Commission) v David John Merrien, Judgment 24/2016), the question of what, if any, financial penalty should be imposed on Mr Merrien was remitted to the Commission for reconsideration.

By the time that the Commission came to reconsider the question of financial penalty, Mr Merrien had pleaded guilty to unrelated charges in the Royal Court, and had been sentenced to five concurrent terms of 4 years' imprisonment.

Mr Merrien is serving a custodial sentence. He has no material income and no substantial assets from which he would able to satisfy a financial penalty, and there is no prospect that he would be in a position to do so within the foreseeable future.

On 30 August 2016 the Commission decided that, in the particular circumstances of this case, it is not appropriate to impose any financial penalty on Mr Merrien (and that in consequence a Public Statement should be published in this amended form).

BACKGROUND

GIBL was incorporated as a limited company in Guernsey on 8 July 2010 and was licensed on 21 July 2010 under the Insurance Managers and Insurance Intermediaries Law to operate as an insurance intermediary for personal lines and commercial insurance.

On 21 July 2011, the licence for GIBL was extended to long term life insurance products under the Insurance Managers and Insurance Intermediaries Law.

On 10 August 2011, GIBL became licensed under the Protection of Investors Law to carry out the restricted activities of Advising and Promotion in connection with Category 1 controlled investment business.

At material times Mr Wickins and Mr Merrien were Directors and the full time employees of GIBL. Mr Wickins was the Managing Director, Money Laundering Reporting Officer and had day-to-day responsibility for the general insurance business of GIBL. Mr Merrien was the Compliance Officer and had day-to-day responsibility for the long-term insurance and controlled investment business of GIBL.

Mr Merrien was also the Authorised Insurance Representative ("AIR") in respect of long-term insurance business and provided advice to clients on long term insurance and controlled investment products, including personal pensions and recommending investment products in respect of pension contributions.

GIBL employed a part time consultant to peer review the activities of Mr Merrien.

GIBL was visited in October 2013 by the Commission's Conduct Unit as part of a thematic review of advice given by insurance and investment intermediaries. That visit identified serious concerns with regard to regulatory compliance. A significant number of clients had received unsuitable investment advice from Mr Merrien, and it appeared that the advice provided was not truly independent. The Unit's report found that record keeping in respect of client files was weak, written 'advice' held on file was not advice but merely a summary of what was discussed with the client, and there was no evidential documentation pertaining to recommended switches between personal pensions and GIBL's own branded Retirement Annuity Trust Schemes. The concerns arising from that visit were referred to the Enforcement Division.

FINDINGS

As a result of the Commission's enquiries, the Commission found that:

Mr Merrien

• Mr Merrien failed to take proper account of the financial interests of GIBL's clients and the information held by GIBL as to their financial needs and appetite for risk.

• Mr Merrien recommended that clients switch a significant portion of their investment portfolio into a specific Investment Fund ("the Fund"), for which Mr Merrien received significant amounts of commission into his personal bank account without the knowledge of GIBL.

• Mr Merrien did not provide clients with an appropriate amount of information regarding the recommendation to invest in the Fund.

• The advice given to GIBL clients by Mr Merrien was not suitable to the relevant clients' needs in that the Fund recommended was higher risk than those clients' stated cautious investment outlook.

• Mr Merrien failed properly to inform himself about the risks of the Fund and either chose to ignore the risk associated with an investment into the Fund or had failed to avail himself with an appropriate amount of information prior to making any recommendation.

• Mr Merrien stated that he had not reviewed the scheme documentation which showed that it is a high risk and speculative investment vehicle and also stated that investors should be prepared to lose all of their capital.

• The investment advice given by Mr Merrien to invest in the Fund was neither i) impartial nor ii) independent.

• Mr Merrien caused GIBL to breach a condition of its licence regarding the removal of records from GIBL's premises.

Mr Merrien's behaviour is considered to be very serious. It was found that he is not a fit and proper person to perform any function within the regulated sectors of the Bailiwick of Guernsey and he has accordingly been prohibited from carrying on any such function.

Guernsey Insurance Brokers Limited

• GIBL and its Board failed to ensure it had adequate systems of control in place in relation to its controlled investment and long-term insurance business, which was being conducted solely by Mr Merrien. This included failing to:

a) discuss investment and long-term insurance business at board meetings;

b) review the Fund adequately or be conversant with the risks associated with an investment into the Fund before allowing it to be recommended to GIBL's clients;

c) have systems of control in place so that it was aware that Mr Merrien was recommending the Fund to all of GIBL's investment and long-term insurance clients;

d) have adequate systems of control in place so that all advice provided by Mr Merrien was subject to independent review;

e) manage the conflict of interest between Mr Merrien acting as compliance officer for GIBL and his being the sole person providing investment advice to clients in respect of long term business.

Mr Wickins

• Mr Wickins failed to appreciate the responsibility of a licensee to make appropriate enquiries before appointing an AIR (Mr Merrien).

• Mr Wickins permitted Mr Merrien to carry on his activities effectively unsupervised.

• Mr Wickins was a member of a board of directors which met only infrequently, and was the managing director of a licensed firm which did not have appropriate systems and controls in place.

• Mr Wickins had placed complete reliance on Mr Merrien as GIBL's AIR. Both directors of GIBL had, in effect, acted in silos in respect of the general insurance, long-term insurance and controlled investment business activities undertaken by GIBL.

• Mr Wickins became aware from a meeting with one of the clients that Mr Merrien had encouraged them to switch to an unsuitable investment into the Fund, and even if up to that time he had not appreciated that Mr Merrien was offering the Fund to all GIBL's clients, he ought then to have looked into Mr Merrien's activities.

CONCLUSIONS

The Commission concluded that the Directors of GIBL had not discharged their duties in accordance with Schedule 4 of the Protection of Investors Law. Mr Wickins did not undertake his duties as a director with adequate competence and soundness of judgement. The Commission also concluded that Mr Wickins and Mr Merrien had not acted with skill, prudence and integrity in accordance with the regulatory requirements as set out in section 2(2) of Schedule 4 of the Protection of Investors Law.

Mr Merrien is not a Fit and Proper person having regard to the factors set out in section 1 of Schedule 4 of the Protection of Investors Law, in particular:

• His probity, competence, soundness of judgement for fulfilling his responsibilities;
• The diligence with which he is fulfilling those responsibilities; and
• The interests of clients or investors being jeopardised.

GIBL, principally due to the actions of Mr Merrien for which it was vicariously responsible, breached the following regulatory requirements referred to in paragraph 2.(2) of Schedule 4 of the POI Law in respect of the suitability of advice provided to GIBL's long-term and controlled investment business clients:

Principles of Conduct of Finance Business

Principle 1 A licensee should observe high standards of integrity and fair dealing in the conduct of its business.

Principle 2 A licensee should act with due skill, care and diligence towards its customers and counterparties.

Principle 3 A licensee should either avoid any conflict of interest arising or, where a conflict arises, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act, or otherwise. A licensee should not unfairly place its interests above those of its customers and, where a properly informed customer would reasonably expect that the firm would place his interests above its own, the firm should live up to that expectation.

Principle 4 A licensee should seek from customers it advises or for whom it exercises discretion any information about their circumstances and investment objectives which might reasonably be expected to be relevant in enabling it to fulfil its responsibilities to them.

Principle 5 A licensee should take reasonable steps to give a customer it advises, in a comprehensible and timely way, any information needed to enable him to make a balanced and informed decision. A licensee should similarly be ready to provide a customer with a full and fair account of the fulfilment of its responsibilities to him.

Principle 7 A licensee should observe high standards of market conduct, and should also comply with any code of standard as in force from time to time and issued or approved by the Commission.

Licensees (Conduct of Business) Rules, 2009

Rule 5.1.1 A licensee must observe the Principles in carrying on its controlled investment business.

Rule 5.2.2(a) A licensee, at the outset of its provision of advisory or discretionary investment services to a client, should ensure that it has obtained sufficient knowledge of the client to ensure that any advice or discretionary decision is suitable to the requirements of the client.

Rule 5.2.2(b) A licensee should establish and maintain systems to ensure that its employees do not procure, endeavour to procure or advise anyone to enter into a transaction if that employee is not competent to advise on that transaction or to assess its suitability for investors.

Rule 5.2.2(c) A licensee must take reasonable steps to ensure that it does not in the course of its controlled investment business –

(i) recommend an investment to a client; or
(ii) effect or arrange a discretionary transaction with or for any client,
(iii) unless the recommendation or transaction is suitable for him having regard to the facts disclosed by that client, the terms of any agreement with that client, and other relevant facts about the client of which the licensee is, or reasonably should be, aware.

Rule 5.2.3(d) A licensee must not recommend a transaction or investment strategy to a client or act as a discretionary manager for him unless it has taken reasonable steps to make him aware of the risks involved, including conflicts of interest.

Rule 5.3.8(b) A licensee must not:

(i) make a recommendation to a client to switch within or between a controlled investment; or
(ii) effect such a switch in the exercise its of discretion for a client,
unless it believes on reasonable grounds that the switch is justified from the client's viewpoint.

Rule 5.4.1 The licensee shall, if responsible for promotion and advertising, must:-

(a) ensure that any materials issued are clear, fair and not misleading; and
(b) take all reasonable steps with a view to ensuring that any form of promotion or advertising in a country or territory outside of the Bailiwick of Guernsey is in accordance with the laws and regulations in force in that country or territory.

Code of Conduct for Authorised Insurance Representatives

Principle 1 An insurance representative shall comply with the principles of the Code and at all times conduct business with utmost good faith and high standards of integrity, exercising due skill, care and diligence when dealing with clients.

Principle 2 An insurance representative shall in the conduct of his business, provide advice objectively and not act in any way which is contrary to this Code or any other relevant legislation or Code of Conduct or Practice.

Principle 27 Insurance representatives advising on long term insurance business shall, in addition to complying with section (A), adhere to the following:

(a) In order to be able to advise a client correctly, the insurance representative should ensure that he has sufficient knowledge of the legislation (including taxation legislation) affecting the products the client already owns or is considering purchasing. If he is unable to advise a client then he should inform the client and, if possible, refer the client to a person who can give him appropriate advice;

(b) the insurance representative shall not advise a client to convert, allow to lapse, cancel or surrender any long term insurance contract unless he can demonstrate the action to be in the best interests of the policyholder. If such action is advised then the advice should be fully documented in a written advice, a copy of which should be sent to the client.

Principle 28 Prior to the inception (or any other material change to the policy including cancellation) of the policy, the insurance representative shall:

(a) Take all reasonable steps to obtain and record information from the client concerning the personal and financial circumstances of that client necessary to give suitable advice.

(b) Provide the client with a copy of the written advice.

(e) Ensure that the client is warned of the possible penalties of early surrender. Where a terminal bonus maybe payable, emphasis that the policy will normally have to run its full term before the bonus becomes payable.

(f) In the case of long term insurance policies where the investment return is not guaranteed, explain that it is not guaranteed. Where a product purports to be guaranteed, explain any conditions or limitations applying to the guarantee. The insurance representative shall use his best endeavours to enable the client to understand the nature of any risks involved.

(i) Explain to the client the amount or percentage of commission that the licensee will receive as a result of the sale or variation of single premium insurance contracts, Traded Endowment Plans and any contract involving "gearing/leveraging" or, in respect of any other policy, when requested. Also, explain any charges (including bid-offer spread charges and cancellation charges) that will or maybe incurred.

(l) If using illustrations, projections and forecasts supplied by an insurer, ensure that the client is provided with all relevant documentation that has been supplied.

There is no criticism of Mr Wickins in connection with general insurance business carried on by GIBL. The criticisms are of his conduct as a director of a regulated firm, and the Commission has found that he does not yet have the competence to perform the functions of director, controller, partner or manager (or AIR) of a firm conducting long-term insurance or controlled investment business.

MITIGATING FACTORS

GIBL suspended Mr Merrien from his position as a director of GIBL when it became aware of the issues relating to the advice provided by Mr Merrien.

GIBL has surrendered its licences for conducting controlled investment business and long-term insurance business and arranged for the transfer of the clients to another insurance and investment intermediary.

Mr Wickins and GIBL have, at all material times, co-operated and assisted fully with the Commission's enquiries.

Mr Martyn Paul Gordon

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "POI Law"),
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc, (Bailiwick of Guernsey) Law, 2000, as amended (the "Fiduciaries Law"),
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended (the "IMII Law"),
The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended (the "Banking Law"), and
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended (the "Insurance Business Law")

Mr Martyn Paul Gordon ("Mr Gordon")

On 17 August 2015 the Guernsey Financial Services Commission ("the Commission") decided:

1. to impose a financial penalty of £45,000 under Section 11D of the Financial Services Commission Law on Mr Gordon;

2. to prohibit Mr Gordon from performing any function under the POI Law, the Fiduciaries Law, the Banking Law, the IMII Law, and the Insurance Business Law for a period of 14 years;

3. to make this public statement under Section 11C of the Financial Services Commission Law.

4. to disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of Mr Gordon.

The Commission considered it reasonable and necessary to make these decisions having concluded that Mr Gordon failed to fulfil the fit and proper requirements set out in paragraph 3 of schedule 1 (minimum criteria for licensing) of the Fiduciaries Law [see (i) below] by actions he undertook whilst employed as a Director of a licensee.

BACKGROUND

The background to these decisions is that;

In May 2015 the Commission became aware that Mr Gordon had been dismissed as a Director from a licensee for 'an act of gross misconduct'.

FINDINGS

As a result of its enquiries, the Commission found that:

Mr Gordon was dismissed for the deliberate misappropriation of client funds involving the transfer of £1,000,000 between two unrelated trusts between the period of October 2014 and March 2015 and;

Mr Gordon admitted to transferring a total of £114,839.90 from four unrelated entities to pay the legal fees of another client who had made allegations against the licensee in relation to a trust structure they managed. Mr Gordon stated he had not told anyone at the licensee about this agreement.

MITIGATING FACTORS

At all material times, Mr Gordon was co-operative with the Commission and assisted with its enquiries.

Mr Gordon has made a substantial financial contribution in order to rectify losses and costs incurred by the licensee.

Mr Gordon has not made any personal financial gain out of the transactions.

In reaching its decision, the Commission has taken into account that Mr Gordon agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty.

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(i) And also Schedule 4 of the POI Law, Schedule 4 of the IMII Law, Schedule 3 of the Banking Law and Schedule 7 of the Insurance Business Law,
sets out the minimum criteria under these laws.

Provident Trustees (Guernsey) Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law"
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciaries Law")
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended ("the Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")


Provident Trustees (Guernsey) Limited ("the Licensee")


Mr William Hunter ("Mr Hunter")
Mr Andrew King ("Mr King")
Mrs Lesley Chapman ("Mrs Chapman") (collectively "the Directors")

On 18 January 2016 the Commission decided:

• to impose a financial penalty of £42,000 under Section 11D of the Financial Services Commission Law on the Licensee;

• to impose a financial penalty of £18,375 under Section 11D of the Financial Services Commission Law on Mr Hunter;

• to impose financial penalties of £10,500 under Section 11D of the Financial Services Commission Law on each of Mr King and Mrs Chapman;

• to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee and the Directors failed to fulfil the minimum criteria for licensing as set out in Schedule 1 to the Fiduciaries Law due to failure to implement appropriate and effective policies, procedures and controls to mitigate the financial crime risks to which the business could be exposed.

In addition, the Commission considered that the Directors have demonstrated a lack of probity, competence and soundness of judgement which is taken into account when considering whether a director is a fit and proper person in order to meet the minimum criteria for licensing set out in Schedule 1 to the Fiduciaries Law. The fact that Mr Hunter acted for a period as the Licensee's Compliance Director and Money Laundering Reporting Officer resulted in a higher financial penalty being imposed on him.

BACKGROUND

The Licensee was visited by the Commission's Financial Crime Supervision and Policy Division in October 2014 and as a result was subsequently referred to the Enforcement Division who conducted a further on-site visit in January 2015.

Fundamental failings were identified as a result of these visits regarding the Licensee's anti-money laundering and countering terrorist financing systems and controls, particularly with respect to relationships assessed as high risk involving Politically Exposed Persons ("PEPs") or linked to sensitive jurisdictions. These failings, if they had materialised, could potentially have caused considerable reputational damage to the Bailiwick of Guernsey.

The failings were compounded by the fact that the Commission had previously visited the Licensee in 2009 and 2011 and similar failings were identified, despite the Licensee having been required to undertake remedial action following the 2009 on-site visit.

It was identified that the remedial measures committed to as a result of previous visits had not been actioned appropriately in all instances. The Licensee's policies and procedures established to forestall, prevent and detect money laundering and terrorist financing had not been implemented effectively and the result was that the Licensee and, as a consequence the Bailiwick were exposed to the risks of money laundering.

As a consequence of the Licensee's failure to prevent a recurrence of the issues highlighted following the on-site visit in 2009, the Commission concluded that the Directors have not fulfilled their corporate governance obligations as required by Regulation 15 of the Regulations.

FINDINGS

The Commission found that:

• The Licensee failed to conduct customer due diligence ("CDD") in accordance with the Regulations and the rules in the Handbook with regards to identifying and verifying all customers, in particular individuals to whom a Power of Attorney had been granted and potential beneficiaries of trusts; in addition, the Licensee acted on instructions from clients without full CDD being conducted on all relevant parties to the relationship;

• Despite having established policies and procedures to manage high risk relationships, the Licensee failed to demonstrate that adequate enhanced due diligence had been conducted on high risk clients, particularly with regard to clients who were PEPs or High Profile Individuals and had links to sensitive jurisdictions and those known to be associated with bribery and corruption risks. Where enhanced due diligence was ineffective, adverse information relating to clients was not picked up by the Licensee, leading to increased exposure to the risk of money laundering;

• The Licensee failed to ensure that the requirements of GFSC Instruction (Number 6) for Financial Services Businesses dated 11 November 2009 were applied fully to its existing customers by failing to satisfy itself that CDD information appropriate to the assessed risk was held in respect of each business relationship;

• The Licensee failed to ensure that the requirements of GFSC Instructions (Numbers 9-12) for Financial Services Businesses in force between 9 March 2010 and August 2011 were applied to its business by failing to ensure that enhanced due diligence was undertaken and special attention given to an existing business relationship;

• The Licensee failed to effectively monitor on-going activity which led to the inability to effectively review risk assessments;

• The Licensee failed to effectively scrutinise unusual transactions;

• The Licensee failed to evidence its consideration of the suspicion reporting requirements on several occasions as well as documenting reasons for delays in making disclosures to the Financial Intelligence Service;

• The Directors allowed themselves to be led by dominant clients and the client directors placed reliance upon conversations and meetings with clients in person as sufficient to satisfy enhanced due diligence requirements, particularly in regard to source of funds ("SOF") and source of wealth ("SOW") where the client was classed as high risk but documentation was not obtained to evidence that SOF/SOW had been established.

As a result, it is the conclusion of the Commission that the business of the Licensee has not been conducted in a prudent manner, having taken into account that its systems and controls did not enable it to comply with its duties under the Regulations and Handbook as set out in Schedule 1 to the Fiduciaries Law.

MITIGATING FACTORS

At all times the Directors co-operated fully with the Commission. The Directors agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalties.

Notice to clients of Provident Financial Services Limited

The enforcement action referred to in this statement does not relate to the services provided by Provident Financial Services Limited which was subject to an on-site visit from the Commission in October 2014 but which was not referred to the Enforcement Division.

End of statement

Mr Rudiger Michael Falla, Mr Richard Garrod, Mr Leslie Hilton, Mr Geoffrey Robert Le Page, Mr Kenneth Richard Leslie Forman

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended (the "Fiduciaries Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the "POI Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the "IMII Law"),
The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the "Banking Law") and
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the "Insurance Business Law") (together "the Regulatory Laws")
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended (the "Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (the "Handbook")

Mr Rudiger Michael Falla – Executive Director ("Mr Falla")
Mr Richard Garrod - Executive Director ("Mr Garrod")
Mr Leslie Hilton – Executive Director ("Mr Hilton")
Mr Geoffrey Robert Le Page – Executive Director ("Mr Le Page")
Mr Kenneth Richard Leslie Forman – Non-Executive Director ("Mr Forman")
(together "the Directors")

On 24 August 2015 the Guernsey Financial Services Commission ("the Commission") decided:

• to impose financial penalties of £50,000 under Section 11D of the Financial Services Commission Law on each of Mr Falla, Mr Garrod, Mr Hilton and Mr Le Page;

• to impose a financial penalty of £10,000 under Section 11D of the Financial Services Commission Law on Mr Forman;

• to make orders under the Regulatory Laws prohibiting Mr Falla, Mr Hilton and Mr Le Page from performing the functions of director, controller, partner and money laundering reporting officer in relation to business carried on by an entity licensed under the Regulatory Laws for a period of 5 years from the date of this public statement;

• to disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of Mr Falla, Mr Hilton and Mr Le Page from the date of this public statement;

• to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Directors failed to fulfil the fit and proper requirements as set out in paragraph 3 of Schedule 1 (minimum criteria for licensing) to the Fiduciaries Law*.

BACKGROUND

The background to these decisions is as follows.

Messrs Falla, Garrod, Hilton and Le Page are executive directors and controllers of Confiànce Limited ("Confiànce"), a company licensed under the Fiduciaries Law. Mr Forman is a non-executive director of Confiànce.

Confiànce was visited by the Financial Crime Supervision and Policy Division of the Commission in April 2015. The findings from the visit were referred to the Enforcement Division.

FINDINGS

Significant failings were identified as a result of the April 2015 visit regarding Confiànce's anti-money laundering and countering terrorist financing systems and controls. These failings, if they had materialised, could potentially have caused considerable reputational damage to the Bailiwick of Guernsey. In particular, the Commission found that the Directors had failed to ensure that Confiànce:

• undertook and regularly reviewed relationship risk assessments in accordance with Regulation 3(2);

• always took reasonable measures to identify and verify customers, beneficial owners and underlying principals, persons purporting to act on behalf of the customer or obtain information on the purpose and intended nature of each business relationship, as required by Regulation 4;

• always undertook enhanced customer due diligence on customers assessed as high risk, as required by Regulation 5;

• performed ongoing and effective monitoring of its existing business relationships, as required by Regulation 11; and

• had appropriate and effective procedures and controls to ensure compliance with requirements to make disclosures under the Disclosure (Bailiwick of Guernsey) Law, 2007 and the Terrorism and Crime (Bailiwick of Guernsey) Law, 2002, as required by Regulation 12(f).

The Commission had previously visited Confiànce in 2010 and identified similar failings as those identified in the April 2015 visit. Confiànce was required to undertake remedial action following the 2010 on-site visit.

A further on-site visit in 2013 resulted in the appointment of an independent person to review Confiànce's monitoring arrangements and governance arrangements against the Finance Sector Code of Corporate Governance. The independent review identified a number of issues to be remedied.

The April 2015 on-site visit identified that findings from the 2010 and 2013 visits had not been actioned appropriately in all instances.

As a consequence of the above failures identified during the April 2015 visit and the failure to address the issues highlighted following the on-site visits in November 2010 and 2013, the Directors have not taken responsibility for the review of Confiànce's compliance with the requirements of the Regulations, as required by Regulation 15.

By failing to ensure that Confiànce's policies and procedures for forestalling, preventing and detecting money laundering and terrorist financing are appropriate and effective, the Directors have failed to understand the legal and professional obligations incumbent upon them. In addition, by failing to remedy deficiencies identified in 2010 and 2013, the Directors have acted without sound judgement and have not fulfilled their responsibilities with the diligence expected of directors.

MITIGATING FACTORS

At all times the Directors co-operated fully with the Commission. The Directors agreed to settle at a very early stage of the process and this has been taken into account by applying a discount in setting the financial penalties.

* And also Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Law and Schedule 7 to the Insurance Business Law, sets out the minimum criteria under these laws.

Guernsey Financial Consultants Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Managers and Insurance Intermediaries Law")

Guernsey Financial Consultants Limited ("GFC")

On 27 February 2015 the Guernsey Financial Services Commission ("the Commission") decided:

1. to impose a financial penalty of £42,000* under Section 11D of the Financial Services Commission Law on GFC and;

2. to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that GFC and its Directors failed to fulfil the minimum criteria for licensing set out in Schedule 4 of the Insurance Managers and Insurance Intermediaries Law by not complying at all times with The Conduct of Business Rules (the "Rules"), The Code of Conduct for Authorised Insurance Representatives (the "AIR Code"), The Finance Sector Code of Corporate Governance (the "Corporate Governance Code") and The Principles of Conduct of Finance Business (the "Principles").

BACKGROUND

The background to these decisions:

Four routine on-site visits conducted at GFC between 2003 and 2012 identified issues requiring action to be undertaken to address deficiencies. In July 2012 GFC was visited by the Insurance Division as part of a thematic review of advice given by insurance intermediaries. As a result of the review, a further thematic visit was carried out to GFC by the Conduct Unit in October 2013. The visit identified a number of concerns with regard to treatment of clients, including the obtaining of adequate information from clients, the provision of written information to clients and the systems and controls for record keeping and corporate governance. The concerns arising from the visit were referred to the Enforcement Division.

FINDINGS

As a result of its enquiries, the Commission found that:

• GFC failed to evidence that it obtained sufficient information about clients' financial and personal circumstances to adequately assess their ability and willingness to take risks. As a result it was not possible to assess whether the recommended products were suitable for the client and would enable them to meet their objectives;

• GFC failed to evidence its research of the marketplace prior to making recommendations to clients. A high number of recommendations were made regarding a small number of product providers without sufficient evidence to demonstrate that other products had been considered;

• GFC was unable to demonstrate that explanations of products and the risks, charges and commission payments involved had been consistently provided in sufficient detail and in a way the client was likely to understand;

• GFC did not keep and properly maintain adequate accounting and other records of its business;

• Insufficient information was found on client files to demonstrate the rationale for early surrender and replacement of policies;

• In addition, the Commission had previously raised concerns with GFC on a number of occasions and over a significant period of time, regarding the lack of client information on file, the reasons for recommendations and the suitability of the products recommended but GFC failed to prevent such issues from recurring;

• the Board of Directors of GFC failed to effectively direct and supervise the affairs of the business and to implement effective compliance procedures.

MITIGATING FACTORS

At all material times, the directors of GFC were open and co-operative with the Commission and have assisted with its enquiries.

In reaching its decision, the Commission has taken into account that the directors of GFC have undertaken to arrange, in principle, for the transfer of its clients to another licensee, thereby maintaining the interests of the clients, having decided to voluntarily surrender its licence under the Insurance Managers and Insurance Intermediaries Law.

* With the agreement of the Commission, GFC has arranged for an independent third party review of its client files to be undertaken by a suitably qualified person. The cost of this review up to an amount of £30,000 will be deducted from the financial penalty payable. GFC agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty.

Notice for clients

In the event that any clients of GFC may be concerned about their long-term insurance products, they should seek advice from a financial adviser before making a decision to sell as early encashment might not be the optimal choice for some products.

End of statement

Woodlock Financial Services (1998) Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended ("the Protection of Investors Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Managers and Insurance Intermediaries Law")

Woodlock Financial Services (1998) Limited ("Woodlock")

On 30 January 2015 the Guernsey Financial Services Commission ("the Commission") decided:

1. to impose a financial penalty of £28,000 under Section 11D of the Financial Services Commission Law on Woodlock and;

2. to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Woodlock failed to fulfil the minimum criteria for licensing set out in Schedule 4 to the Protection of Investors Law by not complying at all times with The Licensees (Conduct of Business) Rules, 2009, issued under the Protection of Investors Law.

BACKGROUND

The background to these decisions is that;

Woodlock was visited by the Conduct Unit in October 2013, as part of a thematic review of advice given by insurance and investment intermediaries. The visit identified a number of concerns with regard to treatment of clients, including the obtaining of adequate information from clients, risk warnings to clients, the suitability of advice and record keeping. The concerns arising from the visit were referred to the Enforcement Division.

FINDINGS

As a result of its enquiries, the Commission found that:

• Woodlock failed to evidence that its advisers obtained sufficient knowledge of the clients and did not document the information in a readily accessible manner;

• Client files did not contain sufficient information regarding the client's financial circumstances to evidence that the advice given was suitable for the client;

• As a result of the above, it was not possible to assess whether the products recommended were suitable having regard to the facts disclosed by the client;

• In addition, the Commission had previously raised concerns with Woodlock over the lack of client information on file and the suitability of the products recommended but Woodlock failed to prevent such issues from recurring;

• In written advice Woodlock informed clients that it had compared the whole of the marketplace using a research tool prior to making a recommendation. However, only a pre-selected range of products was considered. In addition, a risk profiling tool used as one part of the assessment of clients' attitude to risk was not used specifically in the way it was represented to clients;

• Woodlock did not keep and properly maintain records relating to its controlled investment business;

• Woodlock failed to retain responsibility for the compliance function which it outsourced to a third party.

MITIGATING FACTORS

At all material times, the directors of Woodlock were co-operative with the Commission and assisted with its enquiries.

In reaching its decision, the Commission has taken into account that Woodlock put in place a remediation plan to address the issues raised. As a result of the remediation work, Woodlock implemented a new risk profiling system to assist in assessing clients' attitude to risk, made improvements to the form of recording information obtained from clients on file and made changes to the way in which information regarding product research was presented to clients.

In addition, the directors of Woodlock have undertaken to arrange, in principle, for the transfer of its clients to another licensee, thereby maintaining the interests of the clients, having decided to voluntarily surrender its licences under the Protection of Investors and Insurance Managers and Insurance Intermediaries Laws. The financial advisers of Woodlock have arranged to continue to act under the management of another licensee.

Woodlock agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty.

Notice for clients

In the event that any clients of Woodlock may be concerned about their investments, they should seek advice from a financial adviser before making a decision to sell as early encashment might not be the optimal investment choice for some investments. For the avoidance of doubt, the Commission's investigation did not cover mortgage advice which is not a regulated activity.

End of Statement

Ahli United Bank (UK) PLC, Guernsey Branch

​The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law")
The Banking Supervision (Bailiwick of Guernsey) Law, 1994 as amended
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended ("the Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

Ahli United Bank (UK) PLC, Guernsey Branch (the "Licensee")

On 30 October 2014 the Guernsey Financial Services Commission ("the Commission") decided:

• to impose a financial penalty of £70,000 under Section 11D of the Financial Services Commission Law on the Licensee; and

• to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee had failed to ensure that the outsourced compliance arrangements which were applied to its business were appropriate and effective to mitigate the financial crime risks to which the business could be exposed.

BACKGROUND

The background to these decisions is as follows.

The Licensee has operated in Guernsey since 21 September 2000 and since 26 July 2001 under a Banking Administration Agreement with a Guernsey Service Provider.

The Financial Crime Division of the Commission conducted an Anti-Money Laundering/Countering the Financing of Terrorism ("AML/CFT") on-site visit to the Licensee in March 2014 and, as a result of the findings of that visit, subsequently conducted a follow-up visit in conjunction with the Commission's Banking and Insurance Supervision and Policy Division between the end of April and beginning of May 2014. As a result of the findings of the March and April/May 2014 visits, the case was referred to the Commission's Enforcement Division.

The Commission identified a number of areas of non-compliance by the Licensee with the requirements of the Regulations and the rules in the Handbook. The breaches appear to have arisen due to the Licensee failing to ensure that the AML/CFT policies, procedures and controls being applied to its business were applied consistently to its customer base and that the reporting and reviews in its business were sufficiently effective.

FINDINGS

The Commission found that:

• inadequate customer due diligence ("CDD") was being conducted on customers as a result of reliance on CDD and risk assessments conducted by Ahli United Bank (UK) PLC, London, without verifying that these had been undertaken in compliance with the Regulations and rules in the Handbook;

• the Licensee had failed to ensure that customer risk assessments were undertaken in accordance with Regulation 3(2), as a result of which reliable risk profiles could not be formed, expected transaction activity gauged and the purpose and intended nature of the relationship understood with sufficient detail;

• customer risk reviews, which should have brought to the Licensee's attention the extent to which CDD deficiencies existed, had not been conducted or were deemed inadequate by the Commission;

• the Licensee failed to ensure that the requirements of GFSC Instruction (Number 6) for Financial Services Businesses dated 11 November 2009 were applied fully to its existing customers by failing to satisfy itself that CDD information appropriate to the assessed risk was held in respect of each business relationship; and

• the Licensee failed to ensure that ongoing and sufficiently effective enhanced monitoring was undertaken in accordance with Regulation 11 of the Regulations, particularly in the case of Politically Exposed Persons ("PEPs").

Due to the risks in relation to the Licensee's customer base, a significant number of which are high risk and PEP-associated, together with the non-face to face nature of its business activities, these breaches are considered to be serious.

MITIGATING FACTORS

At all times the directors of the Licensee co-operated fully with the Commission and in reaching its decision the Commission recognises that the Licensee has put in place a comprehensive AML/CFT Risk Mitigation Programme to address the risks identified by the Commission, as well as to review more broadly the Licensee's compliance arrangements.

The Licensee has undertaken to commission an independent review of its AML/CFT compliance arrangements to be completed expeditiously to ensure that those arrangements meet the regulatory standards required in the Bailiwick of Guernsey.

The Licensee agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty.

End of statement

The Channel Islands Stock Exchange

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("The Financial Services Commission Law")

The Channel Islands Stock Exchange, LBG.

1. The Guernsey Financial Services Commission (the "Commission") is established pursuant to the terms of the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 and its functions include the supervision of financial services in or from within the Bailiwick of Guernsey.

2. On 21 October 1998, the Commission licensed the Channel Islands Stock Exchange, LBG ('the CISX') under the Protection of Investors (Bailiwick of Guernsey) Law, s. 4 to carry on the restricted activity of operating an investment exchange.

3. In February 2012 the Commission commenced an investigation into the CISX (the "Investigation") in relation to transactions in the listed securities of Arch Guernsey ICC Limited or its incorporated cells, which transactions had been implicated in possible market manipulation and other forms of irregular trading (the "Arch Transactions").

4. The Commission's established procedures provided for decisions as to whether or not to impose sanctions in response to an enforcement recommendation to be taken by a Commissioners' decisions committee, consisting of a number of Commissioners. However in this case, a former director of CISX had also been the Chairman of the Commission.

5. The Commission was concerned to ensure that, despite this unusual circumstance, it would be able to take a decision as to whether or not to impose any sanction in response to the Investigation in a way that was transparent, dispassionate and wholly procedurally fair.

6. Accordingly, in October 2013 once the initial evidence gathering process was completed, Commission senior staff sought advice from senior London Counsel as to whether enforcement action was appropriate. The Commission then sought and obtained from the Royal Court a declaration as to the scope of its powers to appoint an alternate decision-maker. Pursuant to that declaration the Commission:


6.1. Appointed an advisory committee consisting of HM Procureur and the Chairman of the Bar of England and Wales to recommend a Queen's Counsel suitable to be appointed as decision maker; and

6.2. Appointed the duly recommended Queen's Counsel as an officer of the Commission and delegated to him the function of deciding whether or not to impose any sanction on the CISX and related individuals.


7. On 20 December 2013 the Commission's senior staff issued a draft Enforcement Recommendation.
The Commission invited the CISX and other interested parties to consider the Enforcement Recommendation.

8. On 31 January 2014 the Commission and the CISX entered into a settlement agreement. In consideration of the Commission's agreement to take no further action against CISX pursuant to the Enforcement Recommendation, the CISX:


8.1. Admitted that it was seriously at fault in relation to the events to which the Enforcement Recommendation related; and

8.2. Accepted and paid a financial penalty (as provided for under Financial Services Commission (Bailiwick of Guernsey) Law, 1987, s. 11D) in the sum of £190,000.


9. Under the settlement agreement, the Commission reserved, amongst other rights, the right to pursue enforcement action against other parties as appropriate.

10. In January 2014 Commission senior staff received preliminary responses from the former Chief Executive to the Enforcement Recommendation. These preliminary responses were made and accepted without prejudice to the right to make formal submissions to a decision-maker.

11. By July 2014 Commission senior staff, supported by London-based counsel had completed the further investigations necessary in response to the preliminary responses and information received. The senior staff concluded that further enforcement activity was unlikely to be appropriate.

12. The Commission then appointed the decision-maker to sit as a case-review panel and to conduct a case review to determine (including in the light of the view of the Commission's senior staff) whether or not any enforcement action should be taken.

13. Following the completion of the case-review panel, the Investigation is complete. The Commission's findings are as follows:


13.1 The Commission is satisfied that the former Chief Executive did not breach any regulatory requirement in the Enforcement Recommendation, and that the Investigation has revealed nothing that would justify any action in relation to her. She has throughout been and remains a fit and proper person in good standing.

13.2 The Commission confirms that its Investigation has revealed nothing that would justify any action in relation to any present or former Non-Executive Directors of the CISX. Those individuals have throughout been and remain fit and proper persons in good standing.

13.3 The Commission confirms that its Investigation has revealed nothing that would justify any action in relation to any present or former officer of the CISX. Those individuals have throughout been and remain fit and proper persons in good standing.

Willow Trust Limited

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Regulation of Fiduciaries, Administration Businesses, Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciaries Law")
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 ("the Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

The Finance Sector Code of Corporate Governance ("the Corporate Governance Code")

Willow Trust Limited ("Willow")

On 17 June 2014 the Guernsey Financial Services Commission ("the Commission") decided:

1. to impose a financial penalty of £30,000 under Section 11D of the Financial Services Commission Law on Willow and;

2. to make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Willow displayed systemic failings in its anti-money laundering procedures, policies and controls including corporate governance failings and therefore failed to fulfil the minimum criteria for licensing set out in Schedule 1 of the Fiduciaries Law.

BACKGROUND

The background to these decisions is that;

Willow was visited by the Financial Crime and Authorisations Division in April 2014 and subsequently by the Enforcement Division in May 2014.

FINDINGS

As a result of the April and May 2014 visits, the Commission found that:

• Willow's relationship risk assessments considered the identity of the customers, beneficial owners and underlying principals but insufficient consideration was given to the nature of the products or services provided to the customer, the purpose and intended nature of the business relationship or the type, volume and value of activity contrary to Rule 56 of the Handbook. Willow also failed to establish the source of funds and source of wealth for high risk customer relationships contrary to Regulation 5(2)(a)(iii) of the Regulations and Rule 184 of the Handbook.

• Willow failed to review the risk assessments of its business relationships with sufficient regularity contrary to Regulation 3(2)(b) and conduct ongoing CDD as part of its monitoring procedures to ensure that it was aware of any changes in the development of the business relationship contrary to Rule 286 of the Handbook.

• The Board was aware of the issue of the increasing backlog of file reviews and obtained the advice of external compliance consultants to advise on effecting improvements to its procedures to seek to ensure its compliance with its regulatory measures. However this failed to address the existing issues adequately.

• As a result of the above, Willow was unable to adequately scrutinise transactions in accordance with the requirements of Rule 276 of the Handbook.

• Willow failed to advise the Commission of the material failures to comply with the provisions of the Regulations and Rules in the Handbook and the serious breaches of its policies, procedures and controls, contrary to Rule 30 of the Handbook.

MITIGATING FACTORS

At all times the Directors of Willow co-operated fully with the Commission and in reaching its decision the Commission has taken into account that Willow has put in place a remediation plan to address the issues highlighted by the end of September 2014. In 2009 Willow appointed external compliance advisers who consistently reported to the Board that the Company continued to remain compliant with its regulatory obligations. Notwithstanding, the Board of Willow acknowledges that it remains responsible for the review of its compliance with the Regulations as required by Regulation 15. Willow agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty.

Generali Worldwide Insurance Company Limited

The Financial Services Business (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended ("the Insurance Law")The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007, as amended ("the Regulations")
The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

Generali Worldwide Insurance Company Limited ("Generali Worldwide")

On 15 November 2013 the Guernsey Financial Services Commission ("the Commission") decided:

1. To impose a financial penalty of £150,000 on Generali Worldwide under Section 11D of the Financial Services Commission Law; and

2. To make this public statement under Section 11C of the Financial Services Commission Law.

BACKGROUND

Following an on-site visit in August 2011, the Commission undertook an extensive examination of Generali Worldwide's systems and controls.

REASONS

At various times during the period 2008 to 2010, failings in systems and controls occurred in the following areas:

The Licensed Insurers' Corporate Governance Code

Generali Worldwide did not comply with certain reporting requirements relating to its regulatory margin of solvency and on the adequate definition of an investment strategy. Thus, the summaries of adherence to the corporate governance principles submitted by Generali Worldwide for the years 2009 and 2010 were inaccurate.

The Regulations and Handbook

Generali Worldwide failed to comply with certain requirements related to the Relationship Risk Assessment and failed to notify its staff timely of a change in the Money Laundering Reporting Officer.

MITIGATING FACTORS

Since the on-site visit and the subsequent extensive examination, Generali Worldwide elaborated a risk mitigation plan, and implemented changes as a result in the processes and in the control functions that have addressed these failings. Moreover Generali Worldwide supported all the costs related to the examination performed by the Commission.

No policyholder has suffered actual loss as a result of the failures identified.

The Commission has taken Generali Worldwide's proactive approach to dealing and remediating with its concerns into consideration in determining the appropriate regulatory action.

Mr Christopher William Hubbard

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as amended ("the Financial Services Commission Law")
The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002, as amended
The Insurance Business (Bailiwick of Guernsey) Law, 2002, as amended (together "the Insurance Laws")
The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended ("the Banking Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended ("the Protection of Investors Law")
The Regulation of Fiduciaries, Administration Businesses, Company Directors, etc (Bailiwick of Guernsey) Law, 2000, as amended ("the Fiduciary Law")

Mr Christopher William Hubbard

On 15 November 2013 the Guernsey Financial Services Commission ("the Commission") decided:

1. To make orders under the Insurance Laws, the Banking Law, the Protection of Investors Law and the Fiduciary Law ("the Laws") prohibiting Mr Hubbard from holding the position of director subject to regulation under any of the Laws (except for specified current directorships), from any compliance function or acting as Money Laundering Reporting Officer within a person licensed under the Laws for a period of five years;

2. To impose a financial penalty of £10,000 on Mr Hubbard under Section 11D of the Financial Services Commission Law; and

3. To make this public statement under Section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Mr Hubbard's actions failed to meet the fit and proper requirements for a person involved in regulated undertakings.

BACKGROUND

The background to these decisions is that Mr Hubbard allowed an individual, who had been charged with money laundering offences, to be a sole signatory on the bank account of a company controlled by Mr Hubbard, who was aware that the individual had been charged with the money laundering offences when he allowed the individual to become a signatory on the bank account.

Mr Hubbard showed a lack of sound judgement in allowing that individual to become a sole signatory on a company bank account controlled by him.

Directors of Kingston Management (Guernsey) Limited (in administration)

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 ("the Financial Services Commission Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 ("the Fiduciary Law")
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007, ("the Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

PUBLIC STATEMENT RELATING TO:
PETER ALAN LAINÉ OF MULSANNE, RUE D'AVAL, VALE, GUERNSEY GY6 8LD
ROBERT JOHN DU FEU OF APARTMENT 4, ALDBROOK, SAUMAREZ STREET, ST PETER PORT, GUERNSEY GY1 2PU, AND
IAN JAMES BANNEVILLE OF KILAUEA, ROUTE DES COUTANCHEZ, ST PETER PORT, GUERNSEY GY1 2TX

SUMMARY

On 24 May 2010 the Guernsey Financial Services Commission ("the Commission") decided:

  1. to impose financial penalties of £14,000 each on Mr Lainé and Mr du Feu and £7,000 on Mr Banneville ("the Directors") under section 11D of The Financial Services Commission Law; and
  2. to make this public statement under section 11C of the Financial Services Commission Law.

The Commission made these decisions having concluded that the Directors had failed to fulfil certain requirements imposed on them under the Fiduciary Law, the Regulations and the Handbook and to ensure, during their respective periods of appointment, that the fiduciary business referred to below fulfilled the requirements applicable to it.

BACKGROUND

The background to this decision is the Directors' conduct in relation to the fiduciary business of Kingston Management (Guernsey) Limited (now in administration) and its joint fiduciary licensees Kingston Trustees Limited, Wessex Holdings Limited, Oxford Investments Limited, Kendal Limited and Hawkshead Investments Limited (together referred to as "Kingston").

Kingston was formed in 1989 by a UK firm of accountants, which was its exclusive source of business introduction. Mr Lainé and Mr du Feu were appointed as directors in 1989. In October 2007, Mr Banneville was recruited, and he was appointed as a director in the following month. Mr du Feu resigned as a director with effect from 31 December 2008.
Following the introduction of the Fiduciary Law, the Commission granted Kingston a full fiduciary licence in November 2001.

In February 2009, following an onsite inspection, the Commission raised serious issues over Kingston's compliance with the requirements of the Fiduciary Law, which had applied over the previous 8 years, and of the Regulations and the Handbook, which came into force in December 2007. The Commission was particularly concerned about management, control and compliance within Kingston and its handling of some high risk relationships.

Discussions ensued between the Commission and Kingston about further investigation and remedial action, but the Directors felt unable to obtain co-operation and financial resources from its shareholders to secure the necessary changes within Kingston's operations.

Mr Lainé and Mr Banneville, as the current directors, applied to the Royal Court of Guernsey for an administration order in relation to Kingston Management (Guernsey) Limited, and on 8 September 2009 the Royal Court granted the application and appointed Alan Roberts and Adrian Rabet of Begbies Traynor as joint administrators.

REASONS

The Commission has not imposed any sanction in relation to Kingston itself, which is in administration and intends to surrender its fiduciary licence as soon as possible. Both the process of regulatory action and any resulting regulatory sanction could only detract from the joint administrators' work in administering and transferring client structures.

However, irrespective of Kingston's position, the Directors are, during the varying times of their appointments, responsible for the conduct of its business and this statement and the financial penalties recognise that responsibility. The Directors failed to ensure that Kingston:

  1. exercised adequate control over, and held adequate information on, trusts and companies under its management, as a fit and proper licensee is required to do under paragraph 5(3)(b) of Schedule 1 to the Fiduciary Law,
  2. undertook a risk assessment before forming a business relationship as required by Regulation 3(1)(c),
  3. undertook customer due diligence on beneficiaries of structures to which Kingston provided services constituting regulated fiduciary activities as required by Regulation 4(1)(3) and earlier provisions, verified the identity of beneficial owners of a company as required by Rule 106 of the Handbook, undertook customer due diligence on the donees of powers of attorney as required by Rule 112 of the Handbook, and carried out enhanced customer due diligence on beneficial owners as required by Regulation 7(1), and
  4. performed ongoing and effective monitoring of business relationships, as required by Regulations 11(1)(a) and (b).

These failings were noted on specific files and this statement does not suggest that they were endemic throughout Kingston's business. In order to ascertain whether that was the case, the Commission required Kingston to obtain an independent review of all its files, but administration intervened.
This statement does not amount to a public statement about the conduct of Kingston's parent and does not reflect its views.

MITIGATING FACTORS

In reaching these decisions the Commission has taken into account that:

  1. Mr Banneville did not become a director of Kingston until November 2007, six weeks before the Regulations and the Handbook came into effect, and from that time made efforts to change Kingston's culture and procedures.
  2. Mr du Feu was a founding director but has not served as a director since December 2008.
  3. In August 2009 the board concluded that the task of meeting the licensing criteria and the requirements of the Regulations and the Handbook, for the type of client-base Kingston held, would require financial resources which Kingston could not obtain from its shareholders. The directors took a responsible course of action in seeking an administration order and, once that had been made, worked to assist the joint administrators to service and transfer client structures.
  4. The Directors experienced particular difficulties in Kingston's relationship with its parent and were unable to obtain the parent's cooperation in improving standards or obtaining the additional resources needed to service its client-base properly.

Ms Pippa Marie Harbour

ON 22 OCTOBER 2009 THE GUERNSEY FINANCIAL SERVICES COMMISSION DECIDED TO MAKE THE FOLLOWING PUBLIC STATEMENT IN RESPECT OF MS PIPPA MARIE HARBOUR:


The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended ("the Financial Services Commission Law")
The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the Protection of Investors Law")
The Banking Supervision (Bailiwick of Guernsey) Law, 1994 as amended ("the Banking Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 as amended ("the Fiduciary Law")
The Insurance (Bailiwick of Guernsey) Law, 2002 as amended and The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 as amended (together "the Insurance Laws")

PUBLIC STATEMENT RELATING TO THE PERSON KNOWN AS: MS PIPPA MARIE HARBOUR OF SHOREHAM LODGE, LA RUE DES VARENDES, CASTEL, GUERNSEY GY5 7RF

On 22 October 2009 the Guernsey Financial Services Commission ("the Commission") decided:

1. to make prohibition orders under the Protection of Investors Law, the Banking Law, the Fiduciary Law and the Insurance Laws. These orders prohibit Ms Harbour from acting as a director, controller, partner, manager, general representative or authorised insurance representative in:

a) a controlled investment business;

b) a deposit-taking business;

c) a fiduciary business which undertakes regulated activities; and

d) an insurance business or the business of an insurance manager or an insurance intermediary and

2. to make this public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that Ms Harbour was not a fit and proper person to be a director, controller, partner, manager, general representative or authorised insurance representative in a regulated financial services business in Guernsey.

BACKGROUND

The background to these decisions is that Ms Harbour provided false information to the Guernsey Financial Services Commission, including falsely claiming to hold a Master's degree in Business Administration and to be a member of the Securities and Investment Institute. Ms Harbour showed a lack of integrity in informing the Commission, in Personal Questionnaire forms and elsewhere, that she held those qualifications/memberships.

Ms Harbour also failed to disclose in Personal Questionnaire forms that she had previously been known by another name. She gave the Commission birth dates of 22 November 1960 and 22 November 1959 which are both at variance with records recording her birth, marriages and bonds relating to real property.

It is important for regulated financial services businesses and individuals working within them to be aware that false statements about qualifications or other matters that demonstrate a lack of integrity will be investigated and acted upon by the Commission.

The case also underlines the practical importance of financial services businesses meeting their employee screening obligations under the Bailiwick's anti-money laundering and countering the financing of terrorism framework.

22 December 2009
Stephen Trevor
Director of Fiduciary and Intelligence Services
Guernsey Financial Services Commission

Notes:

  1. This is the first public statement made by the Commission under powers which came into effect in 2008.
  2. Ms Harbour will commit an offence if she performs or agrees to be employed as a director, controller, partner, manager, general representative or authorised insurance representative in relation to a regulated activity carried on by a regulated finance business in breach of the prohibition orders.
  3. Under the regulatory legislation, regulated finance businesses must take reasonable care to ensure that none of their functions, in relation to the carrying on of a regulated activity, is performed by a person who is prohibited from performing that function by a prohibition order.
  4. Any person with information to indicate that such an offence has been committed is asked to contact the Commission's Fiduciary and Intelligence Services Division.