Fewer settlements – more hearings

13 January 2020 |

New guidance from The Guernsey Financial Services Commission (“the Commission”) on the way it approaches the exercise of its enforcement powers has been released.

The Guidance Note is designed to keep those affected by the enforcement of such powers informed and ensure the process is completed in a timely manner. However new provisions may have the opposite effect. Nick Robison, Partner of Babbé LLP, and Ryan Courtney, Associate, explain.

The GFSC has just updated its guidance on its own enforcement powers, and has adopted the same starting point as previous iterations. That is the Commission’s (re) statement of the “overriding objective”, which is “to enable the relevant decision-maker to deal with matters in a fair and reasonable manner” and crucially, “ensuring that the matter is dealt with expeditiously and fairly.”

The importance of this restatement is that the updated Guidance Note may have the opposite, practical effect to the “overriding objective as new provisions may mean parties subject to the exercise of the Commission’s Enforcement Powers may now be more reluctant to settle allegations against them and, instead, will insist on a hearing before a Senior Decision Maker. In the event, individual enforcement actions will take longer to finalise, leading to a potential bottleneck in enforcement actions generally, and thereby defeat the overriding objective of “expediency” that the Commission is seeking to achieve.

How has the guidance changed?

The Guidance Note is broadly similar to the previous Guidance Note of October 2017. However, there have been changes and they are noteworthy.

The first change is an express provision that the Commission is not bound to follow the Royal Court Civil Rules, 2007 (“RCCR”) in relation to the disclosure of documents. The inclusion of this provision makes it possible for the Commission to determine its own procedure in relation the disclosure process, albeit subject always to the respondent party’s legitimate expectations and to established principles of procedural fairness and the Commission’s overarching obligation to act in accordance with the Human Rights Law (Bailiwick of Guernsey), 2000.

The second change relates to the finalisation of settlement negotiations. Under both the latest Guidance Note and its predecessor, the conduct of settlement negotiations remains without prejudice until a settlement agreement has been executed between the parties and the Commission. However, the new Guidance Note includes an expectation that the parties will acknowledge their wrongdoing or failings in any settlement negotiations and accept responsibility for these in any subsequent settlement agreement. This is materially different from negotiations relating to the settlement of civil disputes, which are usually undertaken on a “no admissions” basis.

Upon execution, the without prejudice nature of the settlement agreement will fall away. As the settlement agreement is no longer without prejudice once executed, the acceptance of culpability may result in reputational damage and expose the regulated, respondent-party to potential claims by third parties, such as investors or beneficiaries or others to whom that regulated fiduciary owed a duty.

The net effect may be that parties will be willing to risk a more adverse outcome from a Senior Decision Maker than enter into settlement negotiations, when the risk of reputational damage and potential litigation is substantially the same due to the expectation that wrongdoing or failings will be acknowledged. This would increase the Commission’s workload and delay the outcomes of all matters under investigation, contrary to the overriding objective of the Guidance Note.

The enforcement “process” can be difficult. For those subject to that process, it can be a very unsettling experience. Although the new Guidance Note is a welcome development, it does (as ever) lead to as many questions as it does provide answers. The prudent way to respond to enforcement is, of course, to be “up front”. However, that does not mean that a party accused of wrongdoing should eschew legal representation or decide, without taking advice, not to robustly defend the allegations against them. We would always recommend that anyone involved in the enforcement process, whether as a respondent or as a mere witness, obtain appropriate legal representation. Babbé LLP has proven and extensive experience in all types of regulatory matters, including enforcement.

Article by
Ryan CourtneyAssociate
Kirthi KalyanAssociate
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