By Richard Digard
UNLESS you happen to be involved at officer or director level in the operation of a licensed financial services firm, it’s hard to appreciate the significance of this newspaper’s campaign highlighting the role of the regulator and, especially, the political response to it.
Put bluntly, the Jersey Financial Services Commission can break you. It’s the same in Guernsey with its equivalent body. Quite right too, I hear you say. Why shouldn’t finance fat cats who break the rules be punished. They’re there to protect the innocent.
Ah, yes, indeed. Except those same rules can ruin lives and reputations and impose savage financial penalties on directors and officers who haven’t done anything actually wrong or caused anyone to lose money.
Just the risk, or the potential for causing reputational harm to the islands can be sufficient to bring the weight of the commission down on you – and it can do so in the most extraordinarily brutal fashion.
Guernsey lawyers accompanying executives to meetings with the commission can tell you of individuals (“grown men”) reduced to tears by the level, persistency and minute detail of questioning. That’s individuals who, at that stage, haven’t necessarily caused or tried to cause any harm.
So far, so anecdotal. Here’s some fact. “In sporting terms, [the regulator] writes a lot of the rules of the game, but then also acts as the referee. In more legal terms, in performing its enforcement function it operates variously as policeman, prosecuting authority, jury, and judge… and where there is such a concentration of functions within one institution, the importance of having some external and dispassionate check on the proportionality of the outcome is obvious.”
Those are the words of Her Honour Hazel Marshall KC, Lieutenant Bailiff, while sitting on a keynote Guernsey case affecting a fiduciary company whose three senior people were heavily fined and banned from working.
That happened despite their lawyers setting out that 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.
Mrs Marshall’s judgment last year attempted to put some “external and dispassionate check” on the commission and was widely welcomed by many in financial services. Alas for them, it was largely overturned by the Guernsey Court of Appeal, which basically said that reputation is everything.
“It is in Guernsey’s interests to be a location which observes the highest ethical standards,” said the judges. “In our judgment, this point cannot be overstated and it is legitimate for the GFSC to approach its role as a regulator with this in mind. It has been given wide-ranging powers to enforce and uphold good practice in order to ensure that the Bailiwick’s reputation is enhanced and the public are protected from undesirable practices.”
In other words, reputational risk can trump fairness, proportionality or even (as this wasn’t tested) human rights. In crude terms, cock up your filing, slip up on admin, mis-risk rate a client and they can have you.
In Guernsey at least, this is because no one regulates the regulator and its understanding of its powers and duties have expanded without challenge by government or courts. More chillingly, it sets its own appetite for risk and reward rather than that being a political decision. In fact, it’s never even been debated.
So that’s what makes External Relations Minister Ian Gorst’s interview with this newspaper on Saturday so significant. He is prepared to question how the JFSC acts and operates – and to get involved politically.
Specifically, that’s to look at subjecting the commission to the Freedom of Information Law, introducing a third-party appeals process and, very importantly in my view, getting back to a system where the regulator can act as a critical friend and give advice to those it regulates.
“I’m certainly looking to get more involved with whether we’ve got the right regulatory laws in place and how we are implementing that regulation,” he said.
And it’s implementation that’s key here. Speak to people in the industry and the concern is that both commissions go for blood on first contact. Approach with a potential issue or seek guidance on something out of the ordinary and the fear is the regulator’s knee-jerk response is to send in the heavies.
This may be unfair on the regulators, but it’s a widespread view in the sector in both islands, which is why if Deputy Gorst is able to follow through on what he has said to this newspaper, it could be a game-changer for Jersey. Let me explain.
Just over a year ago, Guernsey introduced something called the Lending, Credit and Finance Law. Not unreasonably, this seeks to protect customers who make use of consumer credit and home finance.
Guernsey Post, wholly owned by the States of Guernsey, wanted to recognise the island’s unique, and rare, Golden Guernsey Goats, on which King Charles and Queen Camilla conferred Royal title when they visited the islands in July by issuing a crypto stamp.
Buyers would have received a picture of one of these rather appealing creatures on the physical stamp, but would find out what a unique non-fungible token looked like (hence crypto-stamp) by scanning a QR code on the back.
Legal advice was taken, the launch planned and stamps produced – 15,000 of them with a face value of £10 each. And then the Guernsey Financial Services Commission computer said “No”. The stamp failed to meet requirements. As the GFSC put it, “The law was also timely as it followed increased scrutiny around virtual assets which, across the world, have seen some high-profile failures with associated reductions in the value of the virtual assets”.
Phew. Thank heavens those plucky regulators stopped the States of Guernsey’s own utility from potentially ripping off all those folk wanting to splash out a tenner on a crypto stamp.
Instead, if you can, imagine a world where Guernsey Post had been able to approach the regulator and ask, “we’re thinking of releasing electronic goat stamps, any issues?”
Deputy Gorst recognised that there are difficulties in having an independent regulator which is also providing guidance. Nevertheless, he said, “I want us to get back to [having] a regulator that can help advise and understand firms and help us be more competitive. I am working with the regulator to make sure that we move forward. I see it very much as hand-in-hand work, and that they and I are in it together.”
He wouldn’t have made such comments lightly. In fact, from what was reported, he was flanked by (quote) two “stern-faced” minders so we must assume he’s serious about achieving this aim. Pull it off, and that would represent a significant commercial advantage for Jersey plc – an approachable financial services regulator.
It’s not impossible. The Alderney Gambling Commission used to have a can-do reputation under previous director-general Andre Wilsenach for helping firms legally and properly achieve their objectives, and benefited the island significantly as a result, although that’s tailed off a bit since he left.
So good luck to Jersey in achieving Minister Gorst’s ambitions. The only downside I can see is that having a helpful regulator here could decimate Guernsey’s financial services sector within a decade.
You, and Deputy Gorst of course, might regard that as a plus.
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Richard Digard is a former editor and director of the Guernsey Press and Star and has recently retired as chairman of Guernsey Post Ltd. He has been a Douzenier of the Vale Parish in Guernsey since 2016 and is a consultant and media commentator.
