The Jersey Financial Services Commission has published a paper that sets out its so-called 'guideline approach' to setting the amounts of civil financial penalties when punishing the firms that it regulates. The circumstances of each case are different, so it has built a degree of flexibility into the process.

The Financial Services Commission (Jersey) Law 1998 allows the JFSC to impose a civil financial penalty on a firm if it is satisfied that the firm has contravened a code of practice. These set out the principles and detailed rules to be obeyed "within the conduct of financial services business."

For a failure to notify the JFSC of certain matters specified in a code of practice, the maximum penalty is 4% of relevant income, subject to a cap of £10,000. For contravening a code of practice negligently, the maximum penalty is 7% of relevant income, capped at £4 million. For contravening a code of practice intentionally or recklessly, the penalty is 8% of relevant income, capped at £4 million. For contravening a code of practice in some other way and not rectifying matters to the satisfaction of the JFSC in time, the maximum penalty is 6% of relevant income, also capped at £4 million. This is set out in the Financial Services Commission (Financial Penalties) (Jersey) Order 2015. For a trust company business, 'relevant income' is annual fee income in relation to the business that it does that falls into the ambit of the scope of the Code of Practice for Trust Company Business.

Whenever it considers imposing a penalty, the regulator is obliged to look at the seriousness of the contravention; whether or not the firm ('registered person') knew, or ought to have known, of the contravention; whether or not it reported it of its own accord; whether or not it has taken steps to rectify it and to prevent its recurrence; and other aggravating or mitigating factors. It must ensure that firms cannot expect to profit from contraving codes of practice; it must look at penalties imposed in other cases; and it must predict the financial consequences of a penalty for the firm, its customers and creditors. Any firm may appeal to the Royal Court of Jersey if it thinks that the fine is unreasonable. All contraventions, according to section 4.7, are to be treated as though they will eventually become public knowledge.

Step 1, the aforementioned job of working out how serious the contravention is, obliges the regulator to use a sliding scale. It must, for instance, decide whether the contravention poses a risk to the public of financial loss due to dishonesty, incompetence, malpractice or financial unsoundness. If it poses a low risk of loss, it chooses level 1; if a very high risk, it chooses level 5. For threats to the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters, level 1 bespeaks no significant threat of damage; level 3 is appropriate for significant reputational damage domestically; and level 5 is the level for internationally important reputational damage, which is Jersey's worst nightmare. The JFSC must also choose from five levels of risk that pertain to financial crime. For level 1, 15% of the maximum penalty 'could' be imposed on the firm; for level 2 it is 30%; for level 3 it is 45%; for level 4 it is 60%; for level 5 it is 75%. The regulator appears to think of the amount that it 'could' charge as 'the average' for each band. This is known as the 'step 1 figure.'

Further tweaking is necessary before the regulator alights on the final penalty to impose. It then asks itself if the firm knew of the contravention, taking into account whether it would have done so if only it had followed its own procedures, whether the absence of procedures was a contributing factor, whether "inadequate resourcing of the compliance function" was a factor and whether anyone concealed the contravention from the firm. If it emerges that the firm knew or ought to have known, the JFSC puts an additional amount of up to 50% of the 'step 1 figure.'

Step 3 looks at voluntary reporting. If this has happened, the regulator deducts up to (the figures are vague) 25% of the step 1 figure. If the firm has taken steps to rectify things, another 25% can come off. If there are other aggravating or mitigating factors, the regulator allows itself to add on or deduct 50% of the step 1 figure. This is step 5 and if,  as a result of the contravention, the firm made a profit/avoided a loss/avoided incurring expense, the penalty amount shown in step 5 will rise by that amount - this is step 6. There then follows (step 7) a "quality control check," otherwise known as a "smell test" in which the regulator has a look at penalties for similar things in other jurisdictions (and one jurisdiction - the UK - in particular). It only means to do so, however, to consider how the foreign regulator has treated the seriousness of the violation; it does not pay attention to the actual amount.

There are then other steps, step 13 being the award for early settlement. In the UK the top amount is 30% gross; in Jersey it is a remarkably generous 50% if the firm settles before stage 1 of the JFSC's decision-making process, 25% if it settles before stage 2 and 5% if it settles before stage 3. Unlike the regulator in the UK, the Jersey watchdog makes no pretence that its penalty-setting process is 'scientific' and utterly predictable.