Summary of Royal Court findings in relation to Bordeaux Services (Guernsey) Ltd & Ors v GFSC

Summary

This is a GFSC summary of a Royal Court of Guernsey judgment (11 May 2016) in an appeal by Bordeaux Services (Guernsey) Limited and its directors against fines and prohibition orders imposed by the Commission's Senior Decision Maker (SDM). The case concerned failings in Bordeaux's administration of a Guernsey fund connected to the Arch Cru investment scandal, and the Court used it to set out guidance on how Designated Managers and Fund Directors must exercise their functions and how SDMs should reason their decisions.

The Court upheld the Commission's view that merely following contractual arrangements and scheme particulars is not sufficient for a Designated Manager to properly perform its role. It confirmed that a combination of failings, even if individually not serious, can amount to non-fulfilment of the minimum criteria for licensing (MCL) and justify a finding that the fit and proper person test is not satisfied, supporting prohibition orders without any need to prove that investors suffered a causative loss.

• Conflicts of interest: Directors sitting on both the administrator's and the fund's boards must actively manage acknowledged conflicts of interest; failing to do so is a serious MCL failing.
• NAV notifications: Late notification of NAVs to the stock exchange, caused by lack of diligence and professionalism, is relevant to assessing fulfilment of the MCL.
• Oversight of delegates: An administrator relying on an investment manager for valuations must understand the valuation methodology and put in place procedures to check valuations, rather than being unquestioning.
• Compliance with scheme particulars: Administrators must actively monitor whether investments comply with scheme particulars and give genuine consideration to whether investments meet stated criteria, not merely accept them.
• Payment controls: Adequate procedures must be in place for reviewing and approving payments, understood by staff, to protect investors' interests.
• Record keeping: Full, proper and accurate records must be kept, including genuine (not fabricated) board minutes and retained transaction documentation.
• Procedures and training: Written procedures and client take on procedures must be periodically reviewed, and staff must receive adequate and effective training, including sanctions training.
• Prohibition orders: Prohibition orders can be imposed where a combination of failings creates a risk to the public, even absent dishonesty or a single serious act of incompetence.

The Court remitted the amount of the fine against Bordeaux and the length of one director's prohibition for reconsideration or clearer reasoning by the SDM, but otherwise upheld the Commission's findings. Prohibitions under the Banking, Insurance Business, and Insurance Managers and Insurance Intermediaries Laws were set aside only because the SDM's statement of reasons had not adequately explained the basis for them, with the Court noting the Commission remains free to bring further enforcement action on those grounds if properly reasoned.

Key obligations

• Directors and licensees acting as Designated Manager or Fund Director must actively manage known or acknowledged conflicts of interest rather than merely disclosing them.
• Licensees must implement and periodically review written procedures, including client take on procedures, to identify risks with new business.
• Licensees must maintain full, proper and accurate records, including genuine board minutes reflecting who actually attended meetings.
• Licensees relying on a delegated investment manager for valuations must understand the valuation methodology and implement checks rather than relying totally on the delegate.
• Licensees must have adequate procedures for reviewing and approving payments before funds are released, understood by relevant staff.
• Licensees must ensure staff receive adequate training, including sanctions training, relevant to their functions.
• Administrators must actively monitor and satisfy themselves that investments comply with scheme particulars and are in investors' best interests.

Applies to

licensees acting as Designated Manager, Fund Directors, fund administrators, fiduciaries and administration businesses, directors of licensees regulated under the Protection of Investors Law and the Fiduciaries Law