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;
4. That the Commission is minded to revoke the prohibition order on Mr Wilson’s application at any time after 30 September 2021, in the absence of new evidence that Mr Wilson is not fit and proper; and
5. To make a public statement under section 11C of the Financial Services Commission Law.
The Commission acknowledges that its decision to impose an unlimited prohibition with an indication of the time period after which an application for revocation may be favourably received is a departure from the approach taken in some previous cases. Until the recent decision of the Royal Court in Y v Chairman of the Guernsey Financial Services Commission and Her Majesty’s Procureur (Royal Court, unreported, 47/2018) the Commission believed it had the power to time-limit prohibition orders.
Unfortunately, however, the Royal Court in Y’s case declared that time-limited prohibitions are beyond the scope of the Commission’s powers, and that the Commission has to instead follow the approach taken by the UK Financial Conduct Authority (the “FCA”) and only issue indefinite prohibitions. The Court in Y did however accept that, in appropriate cases, it would be open to the Commission to give an indication of the time period after which it would be minded to look favourably on an application to revoke the prohibition.
Applying these principles to Mr Wilson, the Commission considers that in the absence of any further evidence that Mr Wilson is not a fit and proper person, it would be appropriate to revoke the prohibition at any time after two years and six months have elapsed from the start of the prohibition. Were it not for the decision in Y v GFSC and HMP the Commission would have imposed a time-limited prohibition of two years and six months.
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.
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.
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.
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.
• 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.
• 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.