Civil financial penalties on Registered Persons - methodology for determining the amount

1

A failure to notify the JFSC of certain matters specified in a Code of Practice.

The lower of 4% of the average annual turnover and £100,000.

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.

The lower of 6% of the average annual turnover and £4,000,000.

2A

A contravention committed negligently.

The lower of 7% of the average annual turnover and £4,000,000.

3

A contravention committed either intentionally or recklessly.

8% of average annual turnover.

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[3].

    

Level 3 – Significant risk of loss or occurrence of loss.

    

Level 5 – Very significant risk of loss or 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[4] in Jersey or elsewhere.

Level 1 – Low risk of financial crime occurring.

     

Level 3 – Significant risk of financial crime occurring or has occurred.

     

Level 5 – Very significant risk of financial crime occurring or has occurred[5].

“Seriousness”

Step 1 figure

Expressed as a percentage of the turnover-based reference amount for the applicable penalty band – see Table 2

Level 1

15 % 

Level 2

30 %

Level 3

45 %

Level 4

60 %

Level 5

75 %

Turnover-based reference amount for Step 1

Band 1 penalty

Band 2 penalty

Band 2A penalty

Band 3 penalty

4% of the registered person’s average annual turnover

6% of the registered person’s average annual turnover

7% of the registered person’s average annual turnover

8% of the registered person’s average annual turnover

1

Judge the seriousness of the contravention

The £ amount calculated by reference to the table in paragraph 4.10 of this paper. (the Step 1 figure)

2

Did the registered person know, or ought to have known, of the contravention?

An additional amount of up to 50% of the Step 1 figure.

3

Did the registered person voluntarily report the contravention?

A deduction of up to 25% of the Step 1 figure, where justified.

4

Has the registered person taken steps to rectify the contravention and to prevent its recurrence?

A deduction of up to 25% of the Step 1 figure, where justified.

5

What (other) aggravating / mitigating factors were there?(see Appendix 2)

A (net) additional amount of up to 50% of the Step 1 figure or a (net) deduction of up to 50% of theStep 1 figure.

6

Application of the principle of ensuring that registered persons cannot expect to profit from contraventions.

+ £ xxx, as appropriate (where the quantum of profit can be identified).

7

Have regard to the penalties imposed by the JFSC in other cases.

A consistency check will be carried out, having regard to penalties imposed by the JFSC in other relevant and reasonably comparable cases where applicable.

8

GROSS CALCULATION of penalty to be imposed, using the turnover-based reference amount and before application of the statutory maximum penalty under the Order.(the Step 8 figure).

[This will be the product ofSteps 1 to 7]

9

Reduction, if necessary, to the Step 8 figure so that the penalty does not exceed the statutory maximum penalty permitted under the Order, including any applicable monetary cap.

[ -£xxx, as appropriate.]

10

MAXIMUM-ADJUSTED penalty amount (the Step 10 figure)

£xxx

11

Have regard to the potential financial consequences to the registered person and to third parties (including customers and creditors of the registered person) of imposing the penalty.

[ -£xxx,if appropriate.]

12

ACTUAL penalty to be imposed (the Step 12 figure)

[The Step 10 figure as adjustedby Step 11.]

13

Discount for early settlement (where applicable).

See the JFSC’s policy statement on Regulatory Settlements.

[% discount expressed in monetary terms.]

14

DISCOUNTED penalty to be imposed under settlement agreement.

[The Step 12 figure as adjustedfor the discount in Step 13.]

1

Judge the seriousness of the contravention.

A contravention may be significant and material even if identified through a single event, transaction, customer file or relationship. Seriousness will be assessed on a risk-based and proportionate basis, having regard to the circumstances of the case, including the nature, cause, risk and impact of the contravention, rather than the number of instances alone.

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[8].

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[9].

Level 3 – Significant risk of loss or occurrence of loss.

Level 5 – Very significant risk of loss or 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[10] in Jersey or elsewhere.

Sliding scale:

Level 1 – Low risk of financial crime occurring.

Level 3 – Significant risk of financial crime occurring or has occurred.

Level 5 – Very significant risk of financial crime occurring or has occurred.[11]

The Step 1 figure calculated by reference to the table in paragraph 4.10 of this paper.

2

Did the registered person know, or ought to have known, of the contravention?

In assessing whether the registered person knew, or ought to have known, of the contravention, the JFSC may consider (non-exhaustively):

If the registered person had followed its own procedures, would the contravention have been detected promptly?

Was the absence of procedures a contributory factor to the registered person not detecting the contravention?

Was inadequate resourcing (including of the compliance function) a contributory factor in the registered person not detecting the contravention?

Was the contravention concealed from the registered person (and, if so, to what extent was that concealment reasonably foreseeable or detectable through appropriate controls)?

Was there a deliberate failure to follow internal procedures?

Did the registered person too easily disregard or fail to act on conduct or activities that led to the contravention (for example, risk indicators, warnings or “red flags” that were available to it)?

Did the registered person fail to pay appropriate attention to JFSC guidance, including guidance or lessons contained in feedback papers, public statements or other publications that were reasonably relevant to its business activities, risk profile and circumstances at the relevant time?

Was there a failure to implement internal recommendations (including from compliance, audit or risk) to ensure compliance with a relevant enactment or Code?

Had the registered person previously identified or reported any underlying causes for the contravention to the JFSC?

(N.B. This is not an exhaustive list.)

Knew or ought to have known = an additional amount of up to: 50% of the Step 1 figure

3

Did the registered person voluntarily report the contravention?

Registered persons are required, pursuant to legislation and Codes, to deal with the JFSC in an open and co‑operative manner.

If the contravention was reported to the JFSC, it will be considered under Step 3. Any reduction in penalty will not be automatic and will depend on the circumstances, including the timing, transparency and overall quality of the reporting.

In determining the appropriate percentage under this step, the JFSC may have regard to a range of non-exhaustive factors, including, but not limited to:

how promptly the matter was reported after it was identified, having regard to the circumstances

whether the matter was reported before any external discovery, for example before detection by the JFSC, auditors, counterparties, or the media.

whether the matter was brought clearly to the JFSC’s attention, for example by specific notification rather than being contained solely within a general or periodic report.

the extent to which the report clearly and comprehensively identified the contravention, how it was detected, the timeframe, affected business areas, materiality, and the relevant legal or Code requirements.

the extent to which the report included, where reasonably available, an assessment of actual or potential impact on customers, clients or the market, and any information then available on root cause or possible underlying causes.

whether known immediate risks and prompt risk‑reduction measures were identified.

whether there was a clear approach or commitment for further investigation and remediation.

whether material further information, including on impact, root cause or underlying causes, and any necessary corrections or updates, was provided as soon as reasonably practicable.

For the purposes of Step 3, the JFSC focuses on the information and engagement provided, including where an initial report is followed by further information or updates as matters become better understood by the registered person; remediation actions are considered separately under Step 4.

A deduction of up to 25% of the Step 1 figure, where justified.

(N.B. A failure to voluntarily report would be considered under aggravating factors - see Step 5.)

4

Has the registered person taken steps to rectify the contravention and to prevent its recurrence?

This step includes consideration of the approach by the registered person, on becoming aware of the contravention, to manage and reduce the relevant risks and prevent recurrence.

A registered person is expected to rectify contraventions and take steps to prevent recurrence.

Steps taken to rectify the contravention and prevent its recurrence will be considered under Step 4. Any reduction in penalty will not be automatic and will depend on the circumstances, including the timing, scope, quality and likely effectiveness of the steps taken.

In determining the appropriate percentage under this step, the JFSC may have regard to a range of non-exhaustive factors, including, but not limited to:

the timeliness of remedial and risk-mitigation actions, including whether they were initiated promptly and progressed without undue delay and without prompting or instruction from the JFSC.

the scope, design, implementation and embedding of remedial measures, including amendments to policies, procedures, systems and controls, and the extent to which those measures are comprehensive, proportionate and likely to prevent recurrence.

whether the steps address root causes and, where appropriate, extend across all relevant business areas, not merely the immediate point of failure or contravention.

the level of board or senior management oversight, challenge and accountability.

whether actual or potential harm, including client, customer or fund loss, has been identified, quantified and remediated, including redress where appropriate.

whether interim controls, temporary restrictions or other risk-mitigation measures were applied pending full remediation.

steps implemented or proposed to assess the design, implementation and effectiveness of remediation, including whether any review, challenge or assurance is, where relevant, sufficiently independent from those undertaking the remediation.

Delay, inadequate remediation, or remediation undertaken only after regulatory prompting may also be relevant when determining the appropriate percentage under this step.

A deduction of up to 25% of the Step 1 figure, where justified.

(N.B. A failure to take steps to rectify would be considered under aggravating factors - see Step 5.)

5

What (other) aggravating / mitigating factors were there?

See Appendix 2 for a non-exhaustive list of aggravating / mitigating factors.

(Step 5 will not take into account factors already 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.

6

Application of the principle of ensuring that registered persons cannot expect to profit from contraventions.

Did the registered person make an identifiable quantum of profit/avoid a loss/not incur expense as a result of the contravention?

Were the registered person’s profits inflated as a result of an inadequate spend (of an identifiable quantum) on its compliance function, which contributed to the occurrence of the contravention?

The JFSC may use a gross amount, such as fees charged, as a proxy for profit where it considers that approach to be reasonable and proportionate in the circumstances, unless the registered person provides the JFSC with persuasive evidence to support the use of a different amount, which could include evidence of costs, margins, sectoral benchmarks, relevant accounting information and other information supporting a different measure.

(N.B. This is not an exhaustive list.)

Where, as a result of the contravention, the registered person made a profit/avoided a loss/avoided incurring expense, the penalty amount will be increased by that quantum.

7

Have regard to the penalties imposed by the JFSC in other cases.

In having regard to the penalties imposed by the JFSC in other cases, the JFSC will consider the penalties imposed and how the methodology was applied in other relevant and reasonably comparable cases, where applicable.

This is not to perform a direct monetary comparison as penalty amounts will differ based on turnover, statutory maxima, monetary caps and factual specific circumstances.

Where appropriate, the JFSC may also have regard to outcomes in other jurisdictions to inform its assessment of comparable conduct or relative seriousness. Such outcomes will not replace the JFSC’s consideration of penalties imposed by the JFSC in other relevant cases and will not be used as direct monetary comparators.

A consistency check will be carried out, having regard to penalties imposed by the JFSC in other relevant and reasonably comparable cases where applicable.

8

GROSS CALCULATION of penalty to be imposed, using the turnover-based reference amount and before the application of the statutory maximum penalty under the Order (the Step 8 figure).

[This will be the product ofSteps 1 to 7.]

9

Reduction, if necessary, to the Step 8 figure so that the penalty does not exceed the statutory maximum penalty permitted under the Order, including any applicable monetary cap.

[ - £xxx, as appropriate.]

10

MAXIMUM-ADJUSTED penalty amount(the Step 10 figure)

[The Step 8 figure as adjusted by Step 9]

11

Have regard to the potential financial consequences to the registered person and to third parties (including customers and creditors of the registered person) of imposing the penalty.

The JFSC will consider the potential financial consequences of imposing the penalty where applicable, having regard to the information available to it. Where a registered person considers that imposing the penalty would give rise to material financial consequences for the registered person or for third parties, including customers or creditors, it should provide clear and targeted financial information and any relevant supporting documents. The JFSC may request further information.

Relevant information may include recent audited accounts, management accounts, cashflow forecasts, evidence of contingent liabilities, and, where appropriate, an independent review, assurance or other supporting analysis.

Relevant factors under this step may include:

To what extent would the amount of the penalty materially impair the capacity of the registered person to provide restitution to investors or customers?

To what extent would the amount of the penalty cause the registered person to contravene JFSC Code of Practice financial resource requirements?

To what extent would the amount of the penalty materially impair the registered person’s capacity to provide services to its customers, pay its creditors, or otherwise give rise to material and reasonably foreseeable adverse consequences for third parties, including, for example, through wider financial exclusion in the Island or disruption to the provision of a public function or other essential service on which customers or other persons in Jersey materially rely?

To what extent would the amount of the penalty materially impair the capacity of the registered person to continue in business, excluding the payments of distributions, dividends, bonuses and other discretionary payments?

(N.B. This is not an exhaustive list)

When considering the potential financial consequences of imposing a penalty under this step, the JFSC will have regard to its Guiding Principles, where relevant to that assessment.

In particular, when considering potential financial consequences to third parties, the JFSC may have regard to whether those consequences are relevant to the Guiding Principle of having regard to the best economic interests of Jersey, including by reference to wider public interest and jurisdiction level impacts. This may include whether the penalty amount under consideration would give rise to material and reasonably foreseeable disruption to service continuity, wider financial exclusion, market instability, or impairment of the provision of a public function or other essential service. Any such consequence or risk should be evidenced and causally linked to the penalty, rather than speculative.

The JFSC will have regard to any such consequences in a manner that is consistent with the need for civil financial penalties to be effective, proportionate and dissuasive. Those consequences will be balanced with the JFSC’s Guiding Principles and other relevant statutory factors, and will not be considered in isolation.

[ -£xxx, if appropriate.]

12

ACTUAL penalty to be imposed(the Step 12 figure)

[The Step 10 figure as adjusted byStep 11.]

13

Discount for early settlement (where applicable)

Where a civil financial penalty is imposed under a settlement agreement, a discount will be applied to the Step 12 figure to reflect how early the settlement agreement is executed in the JFSC’s published Decision-Making Process:

Settlement before the conclusion of Stage 1 (Investigation) – 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%.

In determining the appropriate level of discount within the relevant stage, the JFSC will take into account the circumstances of the case, including any efficiencies achieved through settlement. Where significant efficiencies arise, they will typically support a discount at or close to the maximum available at the relevant stage, although the maximum available discount is not applied automatically.

Step 13 is concerned with settlement efficiencies, rather than re-assessing matters otherwise reflected in the penalty calculation.

The JFSC may have regard to the timing, overall quality and practical impact of engagement, including, but not limited to:

a) the timely identification, preservation and provision of relevant information and records, whether helpful or unhelpful to the registered person’s position.

b) the timing and completeness of admissions by the registered person, including any early and meaningful concessions that assisted in clarifying or agreeing key issues, for example, acceptance of key facts and/or the nature of the regulatory concern, including any potential contravention, where appropriate.

c)   the extent to which cooperation, disclosure and engagement by the registered person supported the efficient progression and resolution of the matter, for example, by avoiding or reducing investigative or decision-making steps.

These factors are not exhaustive and will not all be relevant in every case. The appropriate level of discount will be determined within the relevant stage by reference to the circumstances of the case.

[% discount expressed in monetary terms.]

14

DISCOUNTED penalty to be imposed under settlement agreement.

[The Step 12 figure as adjusted for the discount in Step 13.]

1

Judge the seriousness of the contravention

Risk to the public = Level 4

Reputational damage = Level 4

Risk of financial crime = Level 4

Average = Level 4

60% of the turnover-based reference amount.

£4,200,000(the Step 1 figure)

2

Did the registered person know, or ought to have known, of the contravention?

The registered person ought to have known of the contravention. The contravention would likely have been identified sooner had the registered person followed its own procedures, acted on internal risk indicators and escalated recurring control weaknesses appropriately. Relevant management information and compliance monitoring findings were available, but were not acted upon with sufficient urgency.

+35% of the Step 1 figure.

+ £1,470,000

3

Did the registered person voluntarily report the contravention?

No. The contravention was identified following JFSC supervisory engagement.

N/A

£0

4

Has the registered person taken steps to rectify the contravention and to prevent its recurrence?

The registered person invested heavily and promptly implemented a comprehensive remediation programme, strengthened governance arrangements and introduced enhanced monitoring. The registered person also identified affected customers and provided prompt compensation above the minimum amount required to remedy the issue. Although the steps were not initiated until after JFSC engagement, they were progressed in a timely manner, were comprehensive and well-evidenced, and were considered of a quality likely to reduce the risk of recurrence.

-17.5% of the Step 1 figure.

-£735,000

5

What (other) aggravating / mitigating factors were there?

Aggravating:

The registered person had a mixed recent supervisory compliance history, including previous findings in related control areas, although those findings had not resulted in prior enforcement action.

Mitigating:

The registered person co-operated fully with the JFSC investigation, including by responding constructively and in a timely manner to information requests and providing relevant documents and explanations.

A net +10% of the Step 1 figure.

+£420,000

6

Application of the principle of ensuring that registered persons cannot expect to profit from contraventions.

The registered person avoided identifiable expenditure of £250,000 as a result of inadequate investment in systems and controls, which contributed to the contravention.

+£250,000

7

Have regard to the penalties imposed by the JFSC in other cases.

Consistency check carried out, having regard to relevant and reasonably comparable cases where applicable.

N/A

£0

8

GROSS CALCULATION of penalty to be imposed, before the application of the statutory maximum as set out in the Order (the Step 8 figure).

£5,605,000

9

Reduction, if necessary, to the Step 8 figure so that the maximum penalty permitted under the Order is not exceeded.

A Band 2A penalty may not exceed the lower of 7% of average annual turnover and £4 million. In this case, the statutory maximum penalty is £4 million.

N/A

- £1,605,000

10

MAXIMUM-ADJUSTED penalty amount (the Step 10 figure)

£4,000,000

11

Have regard to the potential financial consequences to the registered person and to third parties (including customers and creditors of the registered person) of imposing the penalty.

The Step 10 figure can be borne by the registered person without material and reasonably foreseeable adverse consequences for the registered person or third parties.

N/A

£0

12

ACTUAL penalty to be imposed(the Step 12 figure)

£4,000,000

13

Discount for early settlement.See the JFSC’s Decision-Making Process document.

A settlement agreement was entered into before the conclusion of Stage 1, Investigation, which had commenced after the matter was identified by the JFSC through supervisory engagement.

A 45% settlement discount has been applied to the Step 12 figure. This reflects the significant efficiencies achieved through early settlement, including the registered person’s timely and full admissions, proactive provision of relevant information and records, and early provision of a substantive internal review report. These matters materially assisted the JFSC’s understanding of the facts and issues, reduced further investigative steps that would otherwise have been required, and enabled settlement discussions to be offered before the conclusion of Stage 1.

The discount reflects settlement efficiencies in the circumstances of this illustrative example. It does not duplicate the general co-operation already taken into account as mitigation at Step 5, or re-assess matters otherwise reflected in the penalty calculation.

-45% of the Step 12 figure

-£1,800,000

14

DISCOUNTED penalty to be imposed under settlement agreement.

£2,200,000