Giles Baxter (pictured), the commercial partner at the Jersey law firm of Viberts, dissects the case of SWM Limited v Jersey Financial Services Commission in which the Royal Court of Jersey has awarded a regulated firm 'declaratory relief' by placing its own interpretation on some of the regulator’s directions as well as a stay on another.

SWM is a regulated financial services firm currently subject to regulatory action by the Jersey Financial Services Commission which is investigating the nature of investment advice given by SWM to dozens of clients a decade or so ago.  In the context of those investigations, the JFSC issued a number of a directions to SWM, including, amongst other things, a requirement that SWM commission a report from Grant Thornton into the suitability of the advice that SWM gave to its clients and a prohibition against payments without prior consent unless they were in the “ordinary course of business”.

The Grant Thornton report was commissioned and concluded that of the sample of clients that it considered, the advice given and hence the investments made had been unsuitable.  This prompted a further direction from the JFSC requiring SWM to write to its clients informing them of the report’s finding that the advice provided by SWM was unsuitable.

Against this background, SWM launched two connected applications in the Royal Court seeking firstly a stay to the direction requiring disclosure of the Grant Thornton report to clients on the basis it was premature and secondly a declaration from the court as to whether certain payments it proposed to make in commissioning advice and a report of its own would be in the 'ordinary course' of its business.

The stay application

SWM sought a stay of the disclosure requirement on the basis that it disputed the findings of the report and any disclosures should fairly balanced and thus prepared after a further independent report which SWM wished to procure but which, in effect, the JFSC was preventing by refusing SWM access to its funds and by requiring that the letter is sent to clients at this point.

The stay application was heard and granted in November 2015, with the written judgment being published this month.  The judgment was fairly critical of the regulator, prompting a formal public statement in response.  In summary, the court found that the JFSC’s requirement that SWM inform its clients of the Grant Thornton report findings was premature and concluded further that:

• SWM had effectively been blocked from seeking its own advice and counsel but, nonetheless, was required by the JFSC to draw a damning report to the attention of its clients without having the opportunity to challenge it.
• The JFSC had not dealt fairly with SWM in that it appeared to be preventing SWM from obtaining proper advice and from seeking evidence in circumstances where the regulator was giving every indication that it had already decided there had been misselling.
• The reader of the proposed letter might reasonably assume that as far as the JFSC was concerned the alleged misselling which is disputed by SWM was already established beyond doubt and to send it would inevitably have encouraged claims against SWM where a fuller evidentiary picture may not.

The declaratory relief application

In its second application, heard in January 2016, SWM sought clarity in respect of the JFSC direction preventing payments outside the “ordinary course of business”.  It was important for SWM to have this determined for two reasons.  Firstly, it considered the JSFC had been relying on the direction unfairly to frustrate its attempts to commission the further independent report and, secondly, a deliberate or inadvertent breach of the direction might have amounted to a criminal offence.

The relevant payments in the case were to be made in connection with, amongst other things, the preparation of expert evidence to support SWM’s position in its dealings with the JFSC.  The regulator had taken the stance that such payments could not be made without its prior permission but it had still not granted any such permission by the date of the hearing.

The Royal Court had to determine two substantive questions.

• Did the court have the jurisdiction to, and/or should it, grant a declaratory judgment in this context?
• Assuming it did have jurisdiction that it should exercise, what is meant by “ordinary course of business”?

Did the Court have jurisdiction to give declaratory relief?

When someone is on the horns of a dilemma because he is uncertain of his rights and duties under the law and therefore does not know how he should act, he may be able to obtain a declaratory judgment from the Royal Court for guidance and relief from the dilemma. Declaratory relief is simply a declaration of a state of affairs made by the court. It is not an order made against a party, requiring them to do something. In this case the court was being asked to interpret a direction of a regulator, but a party can go to court to seek a declaration on their rights and the existence of facts or legal principle in virtually any context.

In the SWM case the Royal Court confirmed that it had the discretion to make such a declaration in a situation where clarity is sought for a practical purpose, i.e. where the dilemma is more than fanciful or hypothetical. This is analogous to the position in England, where declaratory relief is also available. The Jersey court found that SWM was making its request for a practical purpose, namely to obtain the court’s view on the meaning of the JFSC direction and thereby to resolve the dilemma of whether it could use its funds for the proposed payments.

Should the court make a declaration in the circumstances?

SWM had summonsed the JFSC to show cause why it thought that this declaratory relief should not be granted, i.e. why it thought that the court should not be allowed to make a declaration on the meaning of its directions. The court also asked Jersey's Attorney General for his views on the case because the SWM summons involved declarations relating to potential criminal offences. The Attorney General's office made submissions that warned the Royal Court not to interfere with the Attorney’s prerogative, which Jersey's constitution grants him, to bring prosecutions. The concern was that a declaration to the effect that no offence was committed might directly affect any future decision to prosecute.

The Royal Court disagreed. It found that it was merely being asked for its interpretation of an administrative direction and that any such declaration of its opinion in that regard would not usurp the Attorney General’s function, even if it were to influence a decision to prosecute.

What is meant by the “ordinary course of business”?

The JFSC argued that the phrase “ordinary course of business” could not be interpreted to include one-off payments such as those SWM proposed to make and suggested that these should be viewed as extraordinary.

However, referring to English authority, the Royal Court disagreed. It held that it was quite possible for a single one-off payment to be made in the ordinary course of a company’s business. It interpreted the phrase as follows.

The expression should be given its ordinary English meaning.
The expression “ordinary course of business” does not preclude a single, one-off exceptional act that the company might never have committed before, or ever commit again.
Actions that are likely to preserve or protect a company’s business against a threat to it may well be in the “ordinary course of its business”.
The question of whether or not an action is in the “ordinary course of business” may be fact-specific and cannot be isolated from the context in which a company conducts its business.

In this case, the Royal Court found that as SWM carries out its business in a regulated environment and part of that business, from time to time, will involve engaging with the regulator and sometimes taking advice in connection with that engagement, it would not seem to be outside the company’s ordinary course of business to make payments for that advice. SWM will therefore feel able to make the payments without the Jersey Financial Services Commission’s prior consent. The judgment noted that the proposed payments would not have affected SWM’s adjusted net liquid asset obligations – the outcome of the case would have been different otherwise.

A rare example of a court interfering with a regulator

This case has been interesting from both a general and regulatory perspective. In general terms, it is an illustration of the sort of case where declaratory relief may be available. From a regulatory perspective, it will be interesting to see whether future JFSC directions are more specific about the nature of permitted payments so that the regulator may retain the control it sought in this case. However, on that note, it might be said that there is something fundamentally wrong with a regulatory authority having control over a person’s ability to fund his case or defence in an investigation that that authority is conducting.  

Finally, the grant of the stay provides a rare example of a court interfering with a regulator’s directions; and with that in mind, perhaps the message to be taken from the judgments in this case is positive for everyone concerned in Jersey’s financial services industry.  Clients and investors can take comfort from the existence of a regulator which acts to protect them; whilst regulated businesses can see that the court is prepared to step in where the regulator achieves the wrong balance between their interests and the protection offered to their clients.

Hitting back after the judgments, the JFSC has issued a formal statement setting out that it had asked SWM for details of the anticipated time-frame and expected cost in relation to the professional opinion it wanted to obtain and that SWM did not provide those details. Despite the observations of the Royal Court, the regulator continues to believe that it was, and remains, reasonable and in the best interests of investors to have required SWM to inform the investors concerned that a professional opinion had been produced in respect of the products they had been sold but that the findings were disputed and under review by SWM.

In the judgment, the Royal Court commented that the JFSC acted too early in requiring SWM to write to clients to place them on notice that the regulator had already commissioned a professional opinion that said that SWM had given clients unsuitable advice. The JFSC's retort to this is that in the past (in an unrelated case) it was criticised publicly "for not informing investors early on of regulatory action, particularly where investors may be contemplating further investments with the same firm."

* Giles Baxter can be reached on +44 (0) 1534 632255 or at giles.baxter@viberts.com