Guernsey’s financial services regulator has fined financial firm Louvre Fund Services and two directors for failing to fully inform investors of risks associated in a fund it had under its administration.
In a statement published on its website the Guernsey Financial Services Commission decided to impose a financial penalty of £42,000 under Section 11D of the Financial Services Commission Law on Louvre; to impose financial penalties of £24,500 and £10,500 on directors Kevin Gilligan and Charles Tracy respectively under Section 11D of the Financial Services Commission Law; to make this statement public under Section 11C of the Financial Services Commission Law.
The commission said in its statement that it considered it “reasonable and necessary” to make these decisions having concluded that Louvre and the directors failed to act in accordance with the minimum criteria for licensing contained in Schedule 4 to the POI Law.
Louvre took over as the designated administrator of an authorised collective investment scheme (“the fund”) in August 2013. The fund was a protected cell company with three cells. Gilligan is the managing director of Louvre and was a director of the fund between October 2013 until September 2015 and Tracy is the chairman and compliance officer of Louvre.
‘A lack of understanding’
Following an investigation into the fund and Louvre, the commission found that Louvre: demonstrated a lack of understanding of the risk profile of the fund and the fund’s main underlying investment.
Louvre admitted that it had a number of concerns but allowed the fund to continue pre-existing actions that had a “dubious benefit to investors”. For example Louvre: permitted a 20% audit hold-back without understanding the reasons for the hold-back; and allowed inter-cell loans to continue despite having concerns about the legitimacy of the loans.
The regulator stated that despite having a number of concerns and recognising that the fund presented a high risk to Louvre, it failed to implement enhanced compliance procedures to manage the risk of the fund and despite the concerns of Louvre, it did not inform the commission of any of these concerns.
As a result, the commission concluded that Louvre did not administer the fund with the appropriate soundness of judgement and diligence.
Mr Gilligan
Gilligan failed to demonstrate he acted with diligence, experience and soundness of judgement in relation to the fund. For example, the commission found that he was unable to explain why the fund was applying a 20% audit hold-back; and did not give sufficient thought as to the benefit to the investors of inter-cell lending or the detriment to the cell, and ultimately investors, of the repayment of the loans with illiquid assets.
The commission formed the view that due to his level of experience, Gilligan was unable to withstand the pressures put on him by the promotor of the fund, who had a significant amount of control over the fund. As a result, Gilligan found himself in a position in which he has had to change stance on a number of matters; Gilligan’s conduct contributed to Louvre’s failure to administer the fund appropriately.
Mr Tracy
The commission ruled that Tracy failed to demonstrate he acted with diligence and soundness of judgement in relation to his role as Louvre’s compliance officer. Tracy had a significant role in ensuring compliance standards were satisfied but failed to ensure that “enhanced compliance procedures were undertaken to manage” the identified risks of the Fund and despite being aware of a number of concerns regarding the fund.
Despite the concerns of Louvre and himself, Tracy did not inform the commission and it found that his conduct contributed to Louvre’s failure to administer the fund appropriately.
Mitigating factors
Louvre recognises that there were issues with its compliance obligations and have taken steps to remediate these issues. This includes a review of their compliance processes and a number of changes to their policies and procedures have been made as a result of the review, including the proposed appointment of a new compliance officer.
Efforts were made to remedy some of Louvre’s concerns and Gilligan resigned as a director of the fund in September 2015.
The commission added that “at all times” Louvre and the directors co-operated fully and agreed to settle at an early stage of the process. This has been taken into account by applying a discount in setting the financial penalties, it said.
