Guernsey's Financial Services Commission is conducting more investigations and handing out more punishments than ever. What happens when firms appeal against those decisions?

Matters came to a head in May when one such appeal (Bordeaux Services (Guernsey) Ltd & Others v the GFSC) was largely successful. The case was connected to the Arch Cru saga, covered many times on Compliance Matters, and concerned the GFSC's decision to ban three of Bordeaux's ex-directors from being directors in future at any companies that fell under the aegis of various financial statutes. After some discussion, the regulator reduced the duration of its prohibition orders against two of the three directors from 15 years to five. The directors appealed against the making of prohibition orders against them, while Bordeaux appealed against the £150,000 regulatory penalty.

On appeal, the Royal Court of Guernsey looked for the 'fair balance' that the GFSC ought to have struck when weighing up the various considerations that should have gone into its decision to impose sanctions. It concluded that the regulator was right to have imposed prohibition orders in respect of two laws but not in respect of the four others that it invoked. The Royal Court, moreover, could not discern any viable reason why the GFSC should have reduced its punishment for only two of the directors.

What must the GFSC do when seeking sanctions?

Deputy Bailiff McMahon ruled that the GFSC must do the following when imposing sanctions on people and firms.

• Provide a fully reasoned decision, particularly as regards the imposition of prohibition orders and their length.
• Show that it has had proper regard to any financial consequences that the imposition of a financial penalty will have on a company.
• Examine previous cases where financial penalties have been imposed and explain how they have taken those into account by way of comparison, by reference to at least one previous case by name.
• For each law under which sanctions are imposed, explain why that is the case.

The Royal Court's decision in the Merrien case

Since then, the Royal Court has handed down a further decision in the matter of David John Merrien v Cees Schrauwers (the chairman of the GFSC), part of which was then heard by the Court of Appeal on appeal by the GFSC in Schrauwers v Merrien.

Let us deal with the Royal Court decision first. This took the form of an appeal challenging the decision of the GFSC to publish a short notice on its website in December 2013 in which it stated that the appellant was "not licensed to carry out controlled investment business" and that he was "also not licensed to carry out long-term insurance business" under the relevant laws. It also challenged a decision of December 2014 to:

• make prohibition orders against the appellant under Guernsey's suite of regulatory laws,
• refuse to apply the exemption set out in section 3(1)(g) Regulation of Fiduciaries, Administration Businesses and Company Directors etc (Bailiwick of Guernsey) Law 2000 (known as the Fiduciaries Law); and
• impose a financial penalty of £200,000 and to make a public statement under ss11D and 11C Financial Services Commission (Bailiwick of Guernsey) Law 1987 (known as the FSC Law).

Although the hearing was held in private, the court stated that because the statement was already public, it would be contrary to the principles of open justice to hear the case in private (hence the judgment being published) and that where the details of a decision under appeal involve a statement that has already been published, even if the parties did not agree to a public hearing, the court was more likely than not to order one.

Statement on website

Because the regulator relied on the full suite of 'protection of investor' laws when making the prohibition orders, the appellant had to invoke the appeal provisions in each one, as well as the provisions in the aforementioned FSC Law.

The court examined the relevant laws and found that there was no right of appeal available to the appellant in respect of the decision to publish the notice in December 2013 or the decision to leave it there. Furthermore, the appellant had actually consented to the wording of such information when his advocate wrote to the GFSC before it was published, stating that it was "perfectly acceptable." The court did, however, observe that it was not sure why the GFSC felt it necessary to continue to have the notice on the website given that events had progressed to final determination, but that whether they wished to remove it was entirely a matter for the GFSC and not something on which the court could rule as part of the appeal.

Prohibition orders

As regards the prohibition orders, it was alleged that there had been a material error as to the procedure followed, particularly the non-compliance by the GFSC with its own published "Guidance Note on the Decision Making Process." Paragraph 9.6.5 of this note stated that the decision-maker should make sure that the party was aware of and had access to that note. The GFSC was unable to show that it had met this requirement and the appellant invited the court to draw an inference that the regulator had not referred to the note at all. The court declined to do so, stating that he was asking it to make an inference that was not warranted. What mattered,  it thought, was whether there had been broad compliance with a fair procedure such that if the overall impression was that the relevant stages had been followed and the appellant had been dealt with fairly, the ground of appeal fell away.

Who can attend meetings with the GFSC?

Paragraph 10.2 of the guidance note indicated who may be in attendance at meetings with the GFSC and, in this case, there were more officers of the GFSC present than usual. The appellant had said towards the end of the meeting that "I feel I am severely outnumbered and I feel pressured into saying certain things that I perhaps don't want to say." The court questioned the wisdom of so many regulators being present at a meeting with an unrepresented party. The director-general, moreover, had been introduced at the meeting as an observer only, but he later intervened in the the proceedings. The court expressed its 'surprise' at this being allowed to happen and called it an "unfortunate turn of events", although it did not count it as a significant error of procedure. The court rejected other arguments about the way the meeting was conducted and dismissed the appeal against the prohibition notices.

Notice under s3(1)(g) Fiduciaries Law

The court found similarly in respect of the GFSC's decision to serve a notice on the appellant under s3(1)(g) Fiduciaries Law. It also briefly considered whether there were any grounds to find that this particular decision was unreasonable or lacking in proportionality. The senior decision-maker (a member of a panel of Queen’s Counsel, all living in the UK, that the GFSC set up in 2014 to determine the outcomes of its major enforcement cases - Guernsey's answer to the British Financial Conduct Authority's Regulatory Decisions Committee) found that the appellant had "recklessly promoted a high-risk investment which was unsuitable for retail investors, and that he had dishonestly diverted payments into his personal bank account." Because of this, he thought, the court's finding that the regulator's refusal to apply the exemption set out in s3(1)(g) was not disproportionate or unreasonable. Instead, he thought that it flowed naturally from the GFSC's findings and the other sanctions imposed on the appellant. That appeal was therefore also dismissed.

Was the financial penalty appropriate?

As regards the imposition of the financial penalty of £200,000, the regulator's 'statement of reasons' had set out the following: "The maximum penalty which the commission has power to impose under section 11D Financial Services Commission (Bailiwick of Guernsey) Law 1987, is £200,000. But for that statutory cap, the commission considers that the seriousness of Mr Merrien's conduct as recorded above, exacerbated by his failure to take responsibility for exposing clients of GIBL to undue risk in connection with a significant part of their pension portfolios, and by his failure to deal with the commission in an open and co-operative manner in the course of these enforcement proceedings, would have merited a substantially higher financial penalty."

The court held that this paragraph showed that the decision-maker misdirected himself when considering his approach to the financial penalty to impose. The matters that section 11D(2) FSC Law required him to take into account were exhaustively listed and there was no general 'catch all' permitting the GFSC to take any other relevant matter into account. The GFSC was as bound by the statutory cap as anyone else.

The court stated that it was "left with the impression that the GFSC has generally recognised that penalties against entities can be higher than against individuals and that the GFSC is perhaps not paying as much regard to the strictures placed on it by the legislature as it should. In particular, by having regard to the level of penalties imposed in the UK where, as I understand it, there is no statutory cap."

As a result, the court found that this was unreasonable in the Wednesbury sense [defined in a case involving Wednesbury Corporation in 1948 as a decision so unreasonable that no reasonable person acting reasonably could have made it] and the decision to impose a penalty of £200,000 was an error of law, having regard to the analysis given in Walters v States Housing Authority.

How should the GFSC approach the imposition of financial penalties?

It was held that in considering whether a person's contravention or non-fulfilment is one of the worst examples of its kind, the GFSC should adopt a similar approach to that of a sentencing court and ask whether it falls within a broad band of cases it regards as amongst the worst examples it encounters in practice.  The focus should initially be on the experience of Guernsey but if it is something about which the GFSC has no prior experience, it can look to other jurisdictions but it should be only to assess whether the contravention or non-fulfilment with which it is dealing can properly be categorised in the most serious category.

The court examined the financial penalty imposed on the appellant and on his co-director and noted that the disparity was so great it brought whether the financial penalty imposed on the appellant was disproportionate into question. This, it thought, was a further reason to set the decision aside. It added that the GFSC also ought to have regard to the person's ability to pay the financial penalty. As the appellant would be unable to pay, this made the level of penalty unreasonable. The court said that the GFSC should reconsider the matter.

The Court of Appeal’s decision

Certain parts of the Royal Court's judgment were appealed against. The Royal Court, it was argued, erred in law in its application of s11D(2) and s11D(2)(e) FSC Law. In particular, it was argued that in deciding whether to impose a financial penalty under s11D(1) and (2) the court did not list all the factors that the GFSC may properly take into account; and that s11D(2)(e) did not require the GFSC to be satisfied that the person concerned was in a position to pay, either at all or in a reasonable period of time.

Counsel for the GFSC submitted that s11D(2) had to be read in conjunction with the suite of regulatory laws that conferred on the GFSC the powers and discretion with which it was supposed to do its job. They said that s8(1) FSC Law set down the overarching powers of the GFSC and that it "may do anything which appears to it to be conducive to the carrying out of its functions or to be incidental to their proper discharge".

Furthermore, they argued, s11D(1) FSC Law allowed for the imposition of financial penalties for not meeting the minimum criteria for licensing under the regulatory laws. Section 24, they claimed, said that the "prescribed laws" included "the regulatory laws" which included, but were not limited to, the Protection of Investors (Bailiwick of Guernsey) Law 1987. The act of imposing a financial penalty was, along with other enforcement sanctions, in support of a statutory function assigned to the GFSC under any enactment which, in this case, was the FSC Law read together with the contraventions of the Protection of Investors Law.

Section 2(4) FSC Law states: "In the exercise of its [...] functions the commission may take into account any matter, which it considers appropriate, but shall in particular, have regard to (a) [the protection of the public interest, including] the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on financial business, and (b) the protection and enhancement of the reputation of the Bailiwick as a financial centre."

The GFSC pointed out that the ellipsis in s2(4) was in keeping with the repeal of the word 'general' by s1 FSC (Bailiwick of Guernsey) (Amendment) Law 2002. It therefore followed that the discretion permitted by s2(4), on a proper construction, was exercisable in relation to both the GFSC's general and statutory functions.

The GFSC submitted that its overriding objectives as set out in s2(4) had to be available to it in its operation of s11D(2), notwithstanding the lack of cross-reference in the latter section. Therefore, in conclusion, it was argued that in addition to being obliged to take into consideration the factors set out in s11D(2), the GFSC was entitled to take into account any other factor relevant to the decision of whether or not to impose a penalty or a decision about the amount, at least insofar as the factor also had a bearing on the public interest and the Bailiwick's reputation.

It was then submitted that it was not mandatory for the person to be able to pay the financial penalty under consideration. All subsections of s11D(2) FSC Law were for consideration and weight should be accorded to them depending on the circumstances.  In construing the statute, the canon of statutory interpretation requiring a narrow construction of penal provisions did not apply in circumstances where a competing public interest was engaged. The GFSC submitted that the approach which had been taken by the Royal Court reflected the approach taken from the criminal law as opposed to that within regulatory matters.

The Court of Appeal said that the broad question was whether, notwithstanding that the statute did not indicate that the GFSC may take into consideration any other relevant matter, the GFSC was entitled to do so (a) because of its overarching objectives according to s2(4) and (b) because the considerations in s11D(2) appeared to relate to aggravating and mitigating circumstances for the person concerned. The court said, however, that for present purposes it was not necessary to embark upon so broad a task.

It noted that it was clear that the GFSC wanted to take the contravention or matter of non-fulfilment into account in a wide context. It held that s11D(2)(b) was expressed widely enough to allow the concerns of the GFSC to be met. Section 11D(2)(b), it thought, indicated that the GFSC must consider the "seriousness of the contravention or non-fulfilment" because the subsection referred to the general concept of "seriousness" rather than "the financial impact" or such like.  "Seriousness" therefore fell to be interpreted as "seriousness" in the context of financial operations in the Bailiwick.

It thus held that the provisions of s11D(2)(b) were wide enough to direct the GFSC to consider the seriousness of the contravention or non-fulfilment in the sense of its effect on the public interest and on the reputation of the Bailiwick as a financial centre.

However, the Court of Appeal said that it did not wholly disagree with the views expressed by the Royal Court since (1) it was not clear that this general line of argument about statutory interpretation was before the court and (2) the concern of the court had arisen out of a different factual context than the one that the GFSC was now proffering. The court had found that the error into which the GFSC had fallen in carrying out the exercise under s11D(2) was to look to other jurisdictions for the purpose of taking into consideration the actual penalties imposed in those jurisdictions, notwithstanding the possibility that each jurisdiction it looked at may have had legislation that did not impose a cap, but had held there was no reason why it could not look to other jurisdictions to assess whether the contravention or non-fulfilment with which it was dealing could properly be categorised in the most serious category.

The Court of Appeal therefore held that in appraising the seriousness of contravention or non-fulfilment, it was perfectly appropriate for the GFSC to look to other jurisdictions for guidance about categorisation, although it could not treat their decisions as precedents.

However, it held that the Royal Court went too far in indicating that a level of penalty would be wrong in principle if it was not capable of being satisfied. On a proper reading of the section, the potential financial consequences to the person concerned and relevant third parties was merely one of a number of specified factors that the GFSC must consider.

Interestingly, the GFSC submitted that although the imposition of a financial penalty under the statute was not designed to bring about insolvency, that did not mean that a penalty could not be fixed that might have such a result. The Court of Appeal had difficulty with that submission: if a penalty brought about some form of insolvency, that would undoubtedly have a financial effect on the creditors and others. Assuming that a penalty under the statute constituted a civil debt for which the GFSC could sue, there seemed no good reason why the State should benefit at the expense of other legitimate creditors.

Points about penalties

This is another example of the sanctions imposed by the GFSC being subject to the scrutiny of the Royal Court and, after that, by the Court of Appeal. The following can be taken from these two judgments.

• There is no statutory right of appeal against the publication of a statement on the GFSC’s website. That, of course, leaves open the possibility of proceedings for the judicial review of such publication.
• Although the GFSC is allowed to have as many officers as it considers fit present at meetings with potential sanctionees, the courts are unlikely to be impressed with excessive attendees where there is an unrepresented party. Furthermore, people who are introduced as observers only should remain so.
• The starting point for the imposition of financial penalties should be comparison with other Guernsey cases. If there are none, the GFSC can look at other jurisdictions but only to assess levels of seriousness; of contravention or non-fulfilment – not as a direct comparator.
• In assessing what sanctions to impose, the GFSC can take into account the effect that the contravention or non-fulfilment may have on the public interest and the reputation of the Bailiwick as a financial centre.
• If somebody cannot pay a penalty, it is still not wrong, in principle, for the regulator to impose one. However, it is unlikely that the GFSC will become a priority creditor if the person is bankrupt or becomes so as a result of the penalty.

*  Mathew Newman can be reached on +44 1481 752253.  Simon Davies can be reached on +44 1481 737181. Sam Dingle can be reached on +44 1481 752221.