Administrative sanctions on financial institutions or individuals who work for them may sound anodyne compared with the threat of civil and especially criminal penalties. But by their nature, administrative sanctions represent a particular challenge to members of the Luxembourg financial community - especially as the European Union takes steps to make their application uniform - and tougher - throughout the Union.
Supervisory authorities may impose sanctions on financial sector players, whether individuals (usually executives or board members) or legal entities, such as banks, investment funds or their managers, that do not comply with regulatory obligations. They have become more important to the industry because of the increasingly granular nature of financial regulation, bringing increased scope for non-compliance, but also because supervisory authorities have a greater motivation to issue formal sanctions for breaches that might in the past have been considered minor failings subject only to a slap on the wrist.
In the wake of the financial crisis, regulators are under greater pressure to penalise non-compliance by banks and other institutions, even in the absence of deliberate or negligent wrongdoing. Notably UCITS V is explicitly incorporating minimum rules on administrative sanctions applicable throughout member states.
The financial regulator, the CSSF, has made clear that this is now an integral part of its policy approach, backed up by the expansion of on-site inspections. Inevitably these are likely to uncover a wider range of regulatory breaches that will be subject to sanctions.
Financial penalties can run as high as 10% of an offender’s turnover. Typically though, the most important impact may be on the reputation of a board member subject to sanctions, even if a financial penalty is relatively small. The fact of having been sanctioned is something that an individual will henceforth have to declare whenever they seek approval as a director - even if the behaviour sanctioned was of a rather minor nature.
What’s more, administrative sanctions are pronounced by the regulator and are not part of a judicial process; there may be no hearing or defence representation for individuals liable to sanction - unlike in criminal cases, where the presumption of innocence exists. A sanction can be appealed, but often financial institutions may not wish to challenge their supervisory authority in Administrative Court proceedings that may in any case take years to resolve. Unlike criminal convictions, administrative sanctions are in the realm of public information and will remain forever in the public domain.
A further issue for Luxembourg institutions and individuals is the risk of administrative sanctions being imposed by other regulators in Europe or even beyond, in cases of overlapping competence by regulators of several jurisdictions. There is as well a risk that this could become a weapon used for reasons other than pure regulatory considerations.
What can financial players do to avoid being sanctioned? Obviously, they should strive to avoid breaching regulatory requirements, but at the least they should aim to be able to document the reasonable nature of their actions with regard to the information available to them at the time. But this must be done at the time - once the CSSF or any other regulator has spotted an apparent breach that cannot be justified, it is too late.