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STATES OF JERSEY
SUNSTONE HOLDINGS LTD. AND DE LEC LTD. – EX GRATIA PAYMENTS TO INVESTORS (P.90/2013) – COMMENTS
Presented to the States on 29th May 2014 by the Council of Ministers
STATES GREFFE
2013 Price code: D P.90 Com.(2)
ADDITIONAL COMMENTS
- In September 2013 the States debated a proposition lodged by Senator
A. Breckon (P.90/2013) that –
• ex gratia compensation should be paid to investors who suffered financial loss as a result of investments in Sunstone and/or De Lec;
• the compensation should be subject to a maximum of £48,000 per investor (100% of the first £30,000 lost and 90% of the next £20,000);
• the compensation should be paid from central reserves, but legislation should be introduced to recover it from the Jersey Financial Services Commission (JFSC); and
• the Chief Minister should bring forward proposals under Article 27 of the Financial Services (Jersey) Law 1998 to establish an Investor Compensation Scheme in Jersey.
- The debate was adjourned on the grounds that a number of States members did not feel they had sufficient information upon which to base a decision and the Chief Minister indicated that in the light of this he would initiate an independent review to clarify various points raised in the debate.
- In November 2013, the Chief Minister invited David Thomas, who has held the position of Chief Ombudsman of the UK Financial Ombudsman Service and other relevant roles, to undertake an enquiry. The terms of reference were agreed with Senator Breckon and were, whether –
• the JFSC should have been aware of warning signs/irregularities, and taken action concerning, the incorporation/operation of Sunstone Holdings Ltd. and De Lec Ltd. by the regulated Principals;
• the JFSC were aware and should have taken action before 2008. In particular whether 2 investors expressed concerns to the JFSC in 2006 or 2007;
• if the JFSC should have been aware and should have taken action before January 2008, that would have made any difference to the loss incurred by investors; and
• there were regulatory breaches on behalf of Goldridge Stone, and whether the JFSC enforcement actions were sufficient.
- All the investors were given an opportunity to make representations to David Thomas.
- His report is attached as an Appendix to these comments. In response to the terms of reference, and also to points that Members raised in the debate, his conclusions are summarised as follows –
• Did 2 investors express concerns to JFSC in 2006 or 2007?
No
• Was JFSC aware, and should it have taken action before 2008? No
• Should JFSC have been aware of warning signs/irregularities, and taken action concerning the incorporation/operation of Sunstone and De Lec by the regulated Principals [Cameron, Foot and Lewis ]?
No
• Were there regulatory breaches on behalf of Goldridge?
I am prevented by law from adding to the JFSC's 2008 statement (in Annex A).
• Were JFSC enforcement actions in respect of Goldridge sufficient?
If JFSC had taken timely and sufficient action, issues including Goldridge (unconnected with Sunstone/De Lec) would have been likely to become public by January 2007.
If JFSC had possessed a wider range of graduated powers these issues could have become public at a much earlier date.
• If JFSC should have been aware and should have taken action in respect of Goldridge before January 2008, would that have made any difference to the loss incurred by investors in Sunstone and De Lec?
Investors would have been unlikely to invest, or increase an existing investment in Sunstone and De Lec after March 2007; but it would have made little or no difference to the losses incurred by those who had already invested by March 2007; and (for the removal of any doubt) it would have made little or no difference to those who had invested by March 2007 but rolled over their existing investments at a later date.
- To gain access to restricted information held by the JFSC, David Thomas was appointed as an agent of the Commission. He could not look into the JFSC's actions without studying information received by the JFSC that is legally confidential. It would be a criminal offence for him to disclose that information and so it is not possible for him to include in his report the full reasons for some of his conclusions. Nothing in the report should be interpreted as constituting such confidential information, or disclosing the existence or absence of such information.
- The comments of the Council of Ministers on P.90/2013 in September 2013 are attached. Ministers remain of the view that –
• the circumstances of the Alternate Insurance Services Limited case are so significantly different from those of Sunstone and De Lec that the former does not establish a precedent of which advantage can be taken in the case of the latter;
• the JFSC acted immediately upon notice in January 2008;
• when investment is contemplated in high risk areas such as off-plan foreign property purchases, investors should always seek independent advice separate from those promoting the investment scheme. The fact that the principals marketing the scheme had been separately approved by the JFSC as fit and proper' for different regulated purposes is not a sufficient reason for not taking proper investment advice, nor for justifying compensation by the taxpayer if the investment decisions taken should prove to be faulty;
• as the JFSC has no statutory responsibility for the scheme there is no case for the Commission to be called on to meet the claim for compensation; and
• any decision on whether the taxpayer should compensate the investors should depend upon whether the circumstances can be seen as sufficiently exceptional in terms of the hardship suffered to justify public support.
- In their previous comments the Council of Ministers expressed the view that it was extremely unlikely that, if the same circumstances had prevailed in the UK, compensation would have been forthcoming under the UK investor protection scheme. On the information that David Thomas had available to him, that was not available to the Council of Ministers at the time that previous comments were lodged, it appears a group of investors might have been subject to compensation under the UK investor protection scheme if the same circumstances had prevailed in the UK. This is detailed in Section 5.5-
- of the Report.
- Jersey currently does not have an investor protection scheme. The reasons why an investor protection scheme has not been introduced in Jersey to date were set out in the comment of the Council of Ministers in September 2013. In summary such a scheme, if it is to be funded by investment advisers, could force many out of business and in the absence of a similar scheme in competitor jurisdictions, such as Guernsey and the Isle of Man, business would be lost. For these reasons the introduction of an investor protection scheme in Jersey is not supported at the present time.
- It is therefore the view of the Council of Ministers that, notwithstanding that it could be said that some of the investors may have fallen within the UK investor protection scheme if their same circumstances had prevailed in the UK, this is not sufficient grounds for suggesting they be compensated in Jersey. Compensation would set a precedent for introducing an investor protection scheme in Jersey which is undesirable for the reasons outlined
above. Alternatively, compensation in this matter could set a precedent which would lead to future applications being made to the States Assembly to effectively act as a compensation scheme funded by the taxpayer. The Council of Ministers are of the view this would be fundamentally wrong.
- In the light of the foregoing the Council of Ministers remain of the view that P.90/2013 as presented should be rejected.
- The Council of Ministers are, however, aware from the report that there is the suggestion that a number of investors might not have invested money or increased an existing investment if issues had come into the public domain in early 2007 which would have had a significant impact on the reputations of Cameron, Foot and Lewis . It is for consideration whether in the light of this a case can be made for this group of investors to be recompensed in some way and the Chief Minister will undertake to report the outcome of further work on this matter to the States at the earliest opportunity.
APPENDIX