Civil financial penalties on natural persons - methodology for determining the amount
- Issued:08 July 2019
- Effective from:08 July 2019
- Last revised:12 May 2022
-
Civil financial penalties on natural persons - methodology for determining the amount
1 Introduction
1.1 The methodology set out in this paper describes the Jersey Financial Services Commission’s (JFSC) guideline approach to the determination of the amount of a civil financial penalty to be imposed on a natural person. The circumstances of each case will be different and the JFSC will apply each step in the methodology with the necessary degree of flexibility and discretion that the particular case will merit.
2 Background
2.1 Pursuant to provisions in the Financial Services Commission (Jersey) Law 1998 (the Commission Law), where the JFSC is satisfied that a registered person[1] has, to a significant and material extent, contravened the Money Laundering (Jersey) Order 2008 or a JFSC Code of Practice (Code), and that the contravention was:
2.1.1 committed with the consent or connivance of, or is attributable to neglect on the part of a principal person, key person or any person who performs or performed a senior management function[2]; or
2.1.2 aided, abetted, counselled or procured by a principal person, key person or any person who performs or performed a senior management function
the JFSC may impose a civil financial penalty on the person concerned.[3]
2.2 For the purposes of this document, a “principal person”, “key person” and a “person who performs or performed a senior management function” will simply be referred to as a “natural person”.
2.3 The maximum penalty that the JFSC may impose on a natural person is set out in the Financial Services Commission (Financial Penalties) (Jersey) Order 2015 (the Order). There are four penalty bands, which are summarised below:
Penalty |
Nature of the contravention by |
Maximum penalty that may be imposed on a natural person |
1 |
A failure to notify the JFSC of certain matters specified in a Code of Practice. |
£10,000 |
2 |
A contravention not falling into Band 2A or Band 3 below and not rectified to the satisfaction of the JFSC within the timeframe determined by the JFSC. |
£200,000 |
2A |
A contravention committed negligently. |
£300,000 |
3 |
A contravention committed either intentionally or recklessly. |
£400,000 |
3 Determining the amount – what the law says
3.1 Article 21B of the Commission Law sets out certain matters that the JFSC must, where applicable, have regard to in considering whether to impose a financial penalty and the amount of the penalty. These include:
3.1.1 The seriousness of the contravention;
3.1.2 Aggravating and mitigating factors (see Appendix 2);
3.1.3 The principle of ensuring that a person cannot expect to profit from contraventions;
3.1.4 Penalties imposed in other cases; and
3.1.5 The potential financial consequences to the person and to third parties (including creditors of the person) of imposing the penalty.
3.2 Natural persons are reminded that Article 21F of the Commission Law provides that a person may appeal to the Royal Court against the imposition of a financial penalty or the amount of a financial penalty on the ground that the decision of the JFSC was unreasonable having regard to all the circumstances of the case.
4 The methodology
4.1 The methodology for determining the amount of a financial penalty responds to Article 21B of the Commission Law by requiring a series of steps to be followed that reflect the statutory obligations imposed on the JFSC by that Article.
4.2 The detail of the methodology is set out in Appendix 1 and is self-explanatory in the main. However, Step 1 of the methodology is described in detail below because it is somewhat more complex than the other steps in the methodology.
4.3 Step 1 requires the JFSC to judge how serious it regards the contravention (or the contraventions, in aggregate) on a scale of 1 to 5.
4.4 The seriousness of the contravention will be judged by its impact on the Guiding Principles that Article 7 of the Commission Law requires the JFSC to have regard to when carrying out any of its functions, namely:
4.4.1 The reduction of the risk to the public of financial loss due to dishonesty, incompetence or malpractice by or the financial unsoundness of persons carrying on the business of financial services in or from within Jersey;
4.4.2 The protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters;
4.4.3 The need to counter financial crime both in Jersey and elsewhere.[4]
4.5 Under the methodology the JFSC will judge the impact of the contravention (or the contraventions, in aggregate) on each of the three Guiding Principles, with Level 1 being the lowest impact and Level 5 the highest.
4.6 The table below summarises the factors that would influence the assessment of impact on each Guiding Principle:
Guiding Principle |
Determining the level (sliding scale) |
The reduction of the risk to the public of financial loss due to dishonesty, incompetence, malpractice, or financial unsoundness of persons carrying on financial services. |
Level 1 – Low risk of loss[5]. Level 3 – Significant risk of loss or significant occurrence of loss. Level 5 – Very significant risk of loss or very significant occurrence of loss. |
The protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters. |
Level 1 – No significant reputational damage. Level 3 – Significant reputational damage domestically. Level 5 – Significant reputational damage internationally. |
The need to counter financial crime[6] in Jersey or elsewhere. |
Level 1 – Low risk of financial crime occurring. Level 3 – Significant risk of financial crime occurring or significant financial crime occurred. Level 5 – Very significant risk of financial crime occurring or very significant financial crime occurred.[7] |
4.7 For consistency, when evaluating the impact of the contravention against the second of the Guiding Principles (reputation) the methodology works on the assumption that the contravention will, if not already, become public knowledge (which, save in exceptional cases, will always be the case in any event through the issuance of a public statement by the JFSC when the financial penalty is imposed – whether under a settlement agreement or otherwise).
4.8 Under the methodology, once the impact of the contravention (or the contraventions, in aggregate) on each of the three Guiding Principles has been judged, the resultant average level[8] would be that which determines the “seriousness” of the contravention and how much in financial terms the “seriousness” factor will contribute towards the final amount of the penalty, as set out in the table below. Under the methodology, this is known as the Step 1 figure – see Table 1 below.
Table 1 |
|
“Seriousness” |
Step 1 figure Expressed as a percentage of the maximum penalty that could be imposed on a natural person – see Table 2 |
Level 1 |
15 % |
Level 2 |
30 % |
Level 3 |
45 % |
Level 4 |
60 % |
Level 5 |
75 % |
Table 2 |
||||
Maximum Penalty |
Band 1 penalty |
Band 2 penalty |
Band 2A penalty |
Band 3 penalty |
£10,000 |
£200,000 |
£300,000 |
£400,000 |
4.9 The other steps to be followed under the methodology in order to determine the final amount of the penalty are described in detail in Appendix 1 but, in summary, they are as follows:
Step |
Description |
Contribution towards penalty amount |
1 |
Judge the seriousness of the contravention |
The £ amount calculated by reference to the table in paragraph 4.8 of this paper. |
2 |
What aggravating / mitigating factors were there? |
A (net) additional amount of up to 50% of the Step 1 figure or a (net) deduction of up to 50% of the |
3 |
Application of the principle of ensuring that a person cannot expect to profit from contraventions. |
+ £ xxx, as appropriate (where the quantum of profit can be identified). |
4 |
Have regard to the penalties in other cases. |
[The use of the methodology should ensure consistency.] |
5 |
GROSS CALCULATION of penalty to be imposed, before the application of the statutory maximum as set out in the Order. |
[This will be the product of |
6 |
Reduction, if necessary, to the Step 5 figure so that the maximum penalty permitted under the Order is not exceeded. |
[ -£xxx, as appropriate.] |
7 |
MAXIMUM-ADJUSTED penalty amount (the Step 7 figure) |
£xxx |
8 |
Have regard to the potential financial consequences to the person and to third parties (including creditors of the person) of imposing the penalty. |
[ -£xxx, |
9 |
ACTUAL penalty to be imposed (the Step 9 figure) |
[The Step 7 figure as adjusted |
10 |
Discount for early settlement (where applicable). See the JFSC’s policy statement on Regulatory Settlements |
[% discount expressed |
11 |
DISCOUNTED penalty to be imposed under settlement agreement. |
[The Step 9 figure as adjusted |
4.10 For illustrative purposes only, Appendix 3 contains a worked example of how the amount of a financial penalty would be determined using the methodology.
Appendix 1 – Methodology for determining the amount of a financial penalty
Step |
Narrative description |
Considerations |
Contribution towards penalty amount[9] |
1 |
Judge the seriousness of the contravention For consistency, the evaluation of the impact against this Guiding Principle will assume that the contravention(s) will, if not already, become public knowledge (which, save in exceptional cases, will always be the case through the issuance of a public statement by the JFSC when the financial penalty is imposed – whether under a settlement agreement or otherwise). |
Judged by the impact on the JFSC’s Guiding Principles[10]. Principle (a) The reduction of the risk to the public of financial loss due to dishonesty, incompetence, malpractice, or financial unsoundness of persons carrying on financial services. Sliding scale: Level 1 – Low risk of loss[11]. Level 3 – Significant risk of loss or significant occurrence of loss. Level 5 – Very significant risk of loss or very significant occurrence of loss. Principle (b) The protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters. Sliding scale: Level 1 – No significant reputational damage. Level 3 – Significant reputational damage domestically. Level 5 – Significant reputational damage internationally. Principle (c) The need to counter financial crime[12] in Jersey or elsewhere. Sliding scale: Level 1 – Low risk of financial crime occurring. Level 3 – Significant risk of financial crime occurring or significant financial crime occurred. Level 5 – Very significant risk of financial crime occurring or very significant financial crime occurred.[13] |
The Step 1 figure calculated by reference to the table in paragraph 4.8 of this paper. |
2 |
What aggravating / mitigating factors were there? |
See Appendix 2 for a non-exhaustive list of aggravating / mitigating factors. (Step 2 will not take into account aggravating or mitigating factors considered in other steps of the methodology.) |
A (net) additional amount of up to 50% of the Step 1 figure or a (net) deduction of up to 50% of the Step 1 figure. |
3 |
Application of the principle of ensuring that a person cannot expect to profit from contraventions. |
Did the person receive an identifiable quantum of income/avoid a reduction in income/avoid incurring expense as a result of the contravention? (N.B. This is not an exhaustive list.) |
Where, as a result of the contravention, the natural person received income/avoided a reduction in income/avoided incurring expense, the penalty amount will be increased by that quantum. |
4 |
Have regard to the penalties in other cases. |
As part of Step 4, where necessary and appropriate, the JFSC will look to other jurisdictions in order to consider how a similar contravention has been treated (in terms of the scale of seriousness but not the quantum of financial penalty imposed). |
A quality control check will be carried out to ensure the JFSC is being consistent. The use of this methodology should ensure consistency. |
5 |
GROSS CALCULATION of penalty to be imposed, before the application of the statutory maximum as set out in the Order (the Step 5 figure). |
[This will be the product of |
|
6 |
Reduction, if necessary, to the Step 8 figure so that the maximum penalty permitted under the Order is not exceeded. |
[ - £xxx, as appropriate.] |
|
7 |
MAXIMUM-ADJUSTED penalty amount |
[The product of Step 5 as adjusted by Step 6] |
|
8 |
Have regard to the potential financial consequences to the person and to third parties (including creditors of the person) of imposing the penalty. |
› To what extent would the amount of the penalty endanger the person’s capacity to pay his or her creditors? › To what extent would the amount of the penalty endanger the solvency of the person? (N.B. This is not an exhaustive list) |
[ -£xxx, if appropriate.] |
9 |
ACTUAL penalty to be imposed |
[The Step 7 figure as adjusted by |
|
10 |
Discount for early settlement |
The JFSC’s policy statement on Regulatory Settlements states that the following discounts will apply: › Settlement before the conclusion of Stage 1 (Investigation) of the Decision-Making Process – up to 50%. › Settlement before the conclusion of Stage 2 (Review of the case by the Executive) – up to 25%. › Settlement before the conclusion of Stage 3 (Consideration of the case by the Board DMP Committee) – up to 5%. |
[% discount expressed in monetary terms.] |
11 |
DISCOUNTED penalty to be imposed under settlement agreement. |
|
[The Step 9 figure as adjusted for the discount in Step 10.] |
Appendix 2 - Aggravating and mitigating factors
Factors that the JFSC will regard as aggravating a contravention include (i.e. this is a non-exhaustive list):
- A failure by the person to take action appropriate to their position on becoming aware of the contravention (determination of the level of aggravation under this factor will take into account, amongst other things, the extent to which the person has executive management responsibility for the part of the registered person’s business affected by the contravention and/or for the particular matter that was the subject of the contravention)
- The person supporting (whether implicitly or explicitly) a business model that encourages a disregard for requirements of a relevant enactment or the Codes of Practice
- The person having a poor compliance record (this will include a failure to follow any direction(s)[14] issued) and the person’s past actions or inactions being a contributory factor to that record
- A failure by the person to pay appropriate attention to relevant guidance issued by the JFSC
- A failure by the person to follow relevant internal procedures
- An absence of relevant internal procedures to prevent the contravention
- A failure to implement internal recommendations to ensure compliance with a relevant enactment or Code of Practice where it was the person’s responsibility to implement such recommendations.
- Clients, customers or funds experiencing a material loss as a result of the contravention, or not making a profit that would otherwise have accrued, absent the contravention
Factors that the JFSC will regard as mitigating a contravention include (i.e. this is a non-exhaustive list):
- The contravention being brought promptly and completely to the attention of the JFSC
- The person taking action appropriate to their position on becoming aware of the contravention
- The person co-operating fully with any investigation
- An evidenced previously strong compliance record
- Procedures were promptly amended to address the contravention
- Swift resolution of any client, customer or fund losses arising as a result of the contravention, or swift payment of compensation to make good a profit that would otherwise have accrued absent the contravention
Appendix 3
Worked example – for illustrative purposes only
- Calculating the amount of a Band 2A penalty.
- The maximum penalty permitted is £300,000.
Step |
Description |
Considerations |
Contribution towards |
Amount |
1 |
Judge the seriousness of the contravention |
Risk to the public = Level 3 Reputational damaged = Level 3 Risk of financial crime = Level 3 Average = Level 3 |
45% of the maximum penalty permitted. |
£135,000 |
2 |
What aggravating / mitigating factors were there? |
Aggravating: The person was responsible for the registered person’s inadequate procedures. Mitigating: Co-operated fully with JFSC investigation. Promptly ensured contraventions were remediated. Promptly ensured revised procedures were put in place. |
A net -10% of the |
-£13,500 |
3 |
Application of the principle of ensuring that a person cannot expect to profit from contraventions. |
None identified. |
N/A |
£0 |
4 |
Have regard to the penalties in other cases. |
Consistency check done. |
N/A |
£0 |
5 |
GROSS CALCULATION of penalty to be imposed, before the application of the statutory maximum as set out in the Order. |
£121,500 |
||
6 |
Reduction, if necessary, to the Step 5 figure so that the maximum penalty permitted under the Order is not exceeded. |
A Band 2A penalty on a natural person may not exceed £300,000. |
N/A |
£0 |
7 |
MAXIMUM-ADJUSTED penalty amount (the Step 7 figure) |
£121,500 |
||
8 |
Have regard to the potential financial consequences to the person and to third parties (including creditors of the person) of imposing the penalty. |
The Step 7 figure can be borne by the natural person and without materially adverse impact on third parties. |
N/A |
£0 |
9 |
ACTUAL penalty to be imposed (the Step 9 figure) |
£121,500 |
||
10 |
Discount for early settlement. |
Settled before the conclusion of Stage 1 of the Decision-Making Process. |
50% discount |
-£60,750 |
11 |
DISCOUNTED penalty to be imposed under settlement agreement. |
|
|
£60,750 |
Endnotes
[1] “registered person” is defined in Article 1 of the Commission Law.
[2] “senior management function” is defined in Article 1 of the Commission Law.
[3] The JFSC may, should it consider it appropriate, also impose a civil financial penalty on the registered person.
[4] It is considered that the other Guiding Principle that the JFSC must have regard to – “the best economic interests of Jersey” – is not relevant in the context of assessing the seriousness of a contravention. See endnote (11) for more information.
[5] “Loss” in this context includes profits foregone or returns not realised.
[6] “financial crime” in this context includes financial crime by a registered person or its customers/clients.
[7] Notwithstanding this methodology, where financial crime has occurred this would not preclude a referral to Her Majesty’s Attorney General (Jersey’s criminal prosecuting authority) and where breaches of the relevant Code of Practice have also occurred consideration of a regulatory sanction other than, or in addition to, a civil financial penalty.
[8] Where the averaging calculation results in a fraction, the nearest whole number will be used.
[9] Where a step in the methodology indicates an increase or decrease would be made to the Step 1 figure the maximum percentages shown are not immutable: where the JFSC considers that the specifics of a case means that a larger or smaller percentage adjustment would be appropriate, it reserves to itself the discretion to make whatever adjustment it considers reasonable.
[10] The Guiding Principle of “having regard to the best economic interests of Jersey” is excluded, on the basis that it is not appropriate in this context. In this regard, the Memorandum of Understanding that the JFSC has signed with the Chief Minister sets out the shared interpretation of that guiding principle:-
“3.4 The Chief Minister accepts the JFSC’s interpretation of the Guiding Principle to have regard to "the best economic interests of Jersey', namely that:
3.4.1 the JFSC should not compromise regulatory standards in order to allow a line of business which a section of the Industry might find attractive;
3.4.2 the JFSC should have regard to the Strategic Plan for Jersey approved by the States of Jersey from time to time, and in particular its objectives in relation to jobs and economic growth;
3.4.3 the JFSC should take full account of the costs and other burden of regulation recognising the international nature of the Island's finance industry and the need to be competitive from the perspective of persons carrying on the business of financial services and users of such services;
3.4.4 subject to the need to maintain regulatory standards, the JFSC should assist in the development of business by resourcing and organising itself to provide timely responses to proposals from persons that are, or are seeking to, carry on the business of financial services and by adopting a regulatory approach that is proportionate to the risks posed by the business concerned;
3.4.5 the JFSC should facilitate innovation by persons carrying on the business of financial services.”
[11] “Loss” in this context includes profits foregone or returns not realised.
[12] “financial crime” in this context includes financial crime by a registered person or its customers/clients.
[13] Notwithstanding this methodology, where financial crime has occurred this would not preclude a referral to Her Majesty’s Attorney General (Jersey’s criminal prosecuting authority) and where breaches of the relevant Code of Practice have also occurred consideration of a regulatory sanction other than, or in addition to, a civil financial penalty.
[14] A direction issued under Article 23 of the Financial Services (Jersey) Law 1998 or under the equivalent provision in one of the other regulatory laws the JFSC administers.
12 May 2022 update
This 12 May 2022 update made consequential amendments required as a result of the enactment of the Financial Services Commission (Amendment No. 8) (Jersey) Law 2022. That law widened the scope of the civil financial penalties regime. The title of this document prior to that update was, “Civil Financial Penalties on Principal Persons”.
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