The recent decision of the Royal Court of Guernsey (the "Royal Court") in Domaille, Clarke and Hannis v Guernsey Financial Services Commission (available here) involved an appeal against sanctions imposed by the Guernsey Financial Services Commission ("GFSC") on three individuals (the "Appellants") in their capacity as directors and managers of a fiduciary services company (the "Decision").
The initial GFSC decision had imposed, amongst other things, lengthy directorship bans on the Appellants of eight, four and three years respectively, and significant fines of £280,000, £90,000 and £30,000 for failing to meet aspects of the Minimum Criteria for Licencing.
The Royal Court, in its judgment, dealt with the various grounds of appeal brought by the Appellants under the Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law 2020 (“the EP Law”) and examined the principles applicable to the GFSC in the exercise of its regulatory powers under the EP law.
The purpose of this article is to highlight some of the observations and findings by the Royal Court and summarise some of the criticisms of the process and approach of the GFSC.
The probity test
As a starting point, the Royal Court outlined the correct approach to the test for probity, which is a key element for the imposition of any prohibition orders under the EP Law. The Royal Court made various observations in relation to the term's basic meaning, the burden of proof and whether the test for probity is a two-stage test. As regards its basic meaning, the Royal Court considered the term to be synonymous with integrity and related to a person's attitude and whether an individual can be regarded as someone who "does the right thing".
The Royal Court then moved on to hold that the burden of proving facts which justify a particular finding lies on the GFSC and that the standard of proof is the usual civil standard of the balance of probability. The Royal Court continued by saying that the enforcement process was an adversarial one and that to treat it any other way would be unrealistic in practice. Finally, the Royal Court confirmed that the test for probity is a two-stage test.
The first stage is to make a determination, based on all the evidence, as to the state of mind of the individual and to assess whether that state of mind was negligent in the sense that the individual knew that what they were doing (or not doing) was ethically wrong. If the answer is yes, then there is a lack of probity. However, if the answer is no and that individual is found subjectively to believe that their conduct is proper, then there is a second test that must be passed. The second question is whether a right-thinking individual in that situation could have believed that. If not, then there is, again, lack of probity.
Ultimately, the judgment concluded that in relation to all three Appellants there was no evidence that any of the matters of which they were accused had caused any harm to clients, beneficiaries, investors, creditors or members of public, nor to the reputation of the Bailiwick.
Sanctions for historic conduct
Since the EP Law only came into force in November 2021 and the fact that the majority of the allegations in this matter pre-dated November 2017, and in some instances related to events that occurred prior to the introduction of the obligation to obtain source of wealth information from clients, the Royal Court was also concerned with the application of comparator cases prior to the EP Law.
The Royal Court observed that “…whilst there may be no period of prescription as regards sanctions for regulatory offences, imposing sanctions for very historic apparent misconduct as if it were recent must run the risk of being unfair on any basis”.
Public statements
The issuance of the Decision itself and the subsequent publication of the Prohibition Orders relating thereto on the GFSC website was also brought into focus. This was because, in summary, the publication occurred despite (i) GFSC's own guidance explaining that it would not give public notice of such sanctions for a period of time in order to enable parties to notify any intention to appeal and (ii) the Appellant's informing the GFSC of their intention to Appeal.
The Appellants were therefore forced to seek injunctive relief from the Royal Court (which they received) and the GFSC were in turn ordered to remove the notices. The Royal Court cited the Commission's:
"… apparent conviction that its own view must be rightful because it was exercising its functions as a regulator, its seeming bewilderment at being challenged, its view that its Decision could not reasonably be said to be "contested" just because it was going to be appealed, and its obliviousness to the fact that the Appellants'' reputations could be irreparably damaged in a situation where a successful appeal just might show this to have been unjustified."
Criticisms of the GFSC's approach
Having reviewed the material in the case, the Royal Court was deeply critical of the GFSC's approach. In testing whether the sanctions ultimately imposed were unreasonable or disproportionate, the Royal Court noted that:
- "a subsequent focus of the ED and the Commission becoming the perceived importance of repelling challenge, winning all arguments and finding justification for the Commission’s initial decision";
- "…the flawed and unfair introduction of charges of want of probity at the Final Notice stage, based on no relevant further evidence";
- "refusal to give any appropriate recognition or credit for very major, and apparently effective, measures taken to restore the administration of ATL’s business to a proper track, certainly from July 2019 if not to some degree before";
- "failure to keep in mind the distinction between ATL the company, and the Appellants as individual persons, and consequent failure to consider and engage with the question of which defaults were properly and fairly sanctioned against ATL, and which against the Appellants personally";
- "failure generally to pay fair regard to how far the matters of charge were historic by the time of the Reports and the Decision (and indeed, even predating the supposedly Relevant Period), and specifically failure to observe the principle of non-retrospectivity of legal powers of sanction, even just as a matter of fundamental fairness"; and
- "failure to observe the Commission’s own principle of consistency, by paying actual regard to the sanctions imposed by the Commission in similar cases, and/or not disclosing some reasoned relationship between such sanctions and those imposed in this case".
As a result of the foregoing issues the Royal Court highlighted that the financial services industry is an extremely important part of the economy of Guernsey and thus it is in Guernsey’s interests to be an attractive location for responsible and respectable fiduciary or finance businesses. The Royal Court acknowledged that the GFSC is "fervent in the performance of its functions of protecting the public interest and protecting and enhancing the reputation of the Bailiwick as a financial centre".
However, it noted that the GFSC may, on occasion, overlook the fact that the reputation of the Bailiwick as a financial centre includes the reputation of the Commission itself as a regulator. The Royal Court concluded that the reputation of the Bailiwick and the regulation of the financial services needs to be one of being “firm but fair” and the GFSC needs to "keep in mind the danger that, in the interests of being perceived to be the former, it may overlook the latter", in particular, as regards "dealing with 'small' businesses - persons or entities who could not afford the costs of challenging a decision of the Commission".
Conclusion
The Royal Court of Guernsey upheld the appeal and as a result the prohibition orders were quashed and the financial penalties reduced. The GFSC has since issued a statement indicating that they are preparing to ask the Guernsey Court of Appeal to review legal aspects of the judgment. Despite the findings by the Royal Court, it is unclear at this stage what affect, if any, this judgment will have on the GFSC when imposing prohibition orders in the future. At the very least though, the judgment provides important insight into what financial services businesses and the people involved therewith can expect when the GFSC exercises its powers under the enforcement process (and the EP Law).
