Case review: first GFSC enforcement decision under LCF Law – what are the key lessons for Guernsey directors?

Under the LCF Law, lending and credit activities must be licensed.

The firm had previously been registered under the Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008 (a lighter regime). When the LCF Law came into force, the firm applied for a licence. While its application was under review, the GFSC granted discretionary exemptions under section 40 of the LCF Law, subject to strict conditions.

When the licence application was refused in November 2023, further exemptions were granted to allow the firm to wind down its business in an orderly manner.

What were the key conditions of exemption?

• No further borrowing from Person A without GFSC consent
• The firm had to adhere to a repayment schedule to Person A, with any deviations to be promptly reported to the GFSC
• Full cooperation with the GFSC, including compliance with document requests under statutory notices

What were the discretionary exemption breaches?

Despite the conditions, in September 2023 the firm borrowed further funds from Person A without consent. The firm failed to comply with the agreed repayment schedule and did not notify the GFSC of these failures. 

Substantial sums from Person A were diverted by Director A to his other businesses (Company B and Company C) and also to himself personally. It was found that the firm had weak governance – Director A was the sole signatory on the firm’s accounts and there were no documented approval processes.

The GFSC also found that Director A had provided misleading statements, including telling them that certain loans had been repaid when they had not. The September 2023 loan from Person A was omitted from lists submitted to the GFSC. Director A claimed £200,000 was available in the firm’s account to support repayments, which was untrue. 

In addition, both Director A and Director B failed to provide documents requested under section 7 notices of the Enforcement Powers Law.

Contraventions

Channel Island Finance Limited

• Materially contravened section 40 of the LCF Law (breach of exemption conditions)
• Materially contravened section 7 of the Enforcement Powers Law (failure to provide documents)

Director A

• Materially contravened sections 7 and 109 of the Enforcement Powers Law (failure to comply with notices and issuing misleading statements)
• Failed to meet the fit and proper person test under Schedule 4 of the LCF Law
• Personally benefited from the diversion of funds 

Director B

• Misled Person A about loan sizes by suggesting all loans were small (under £2,000) when they were not
• Failed to meet the fit and proper test (though no evidence of personal financial gain)

Fit and proper directors 

Schedule 4 of the LCF Law requires the GFSC to assess whether persons are “fit and proper” by reference to three key areas: 

Integrity, probity and honesty

• Director A: Failed this test. He misled the GFSC (by omission and misstatement), diverted Person A’s funds into his own businesses and was sole signatory without transparency
• Director B: Also failed. He misled Person A about the size of loans advanced by the firm, showing dishonesty / lack of probity, even though he did not benefit personally

Competence and capability

• Director A: Failed here due to very poor governance and management practices — no oversight, no proper records, misuse of investor funds
• Director B: His role in misrepresenting loan amounts showed lack of diligence and professional judgement 

Financial soundness

• Director A: His “impecuniosity” (the GFSC’s word) was taken into account. He was unable to pay the full penalty that would otherwise have been imposed (£175,000 reduced to £21,000). This raised questions under financial soundness
• Director B: No specific issues identified under financial soundness

Director A

• Fine of £21,000 (reduced from £175,000 due to inability to pay and fairness to creditors)
• Seven year prohibition from holding any supervised role in Guernsey
• Disapplied exemption preventing reliance on fiduciary law carve-outs for seven years

Under the LCF Law, some businesses (such as licensed fiduciaries, lawyers or accountants) may rely on a statutory carve-out that exempts them from needing a separate LCF licence when carrying out certain activities that are incidental to their fiduciary or professional work.

For example, a licensed fiduciary might provide credit or loan broking to a trust or client as part of their fiduciary duties and ordinarily wouldn’t need an LCF licence for that because of the carve-out. Director A and Director B cannot use these carve-outs to carry on any lending, credit or finance business in Guernsey for the duration of the sanction.

Even if they held (or in future obtained) another licence, for example as fiduciaries, they would still need a full LCF licence if they wanted to be involved in lending / credit — the shortcut is blocked. They are effectively barred from all forms of lending / credit activity, not just under their current set-up.

Director B

• No fine imposed
• Two years and one month prohibition from supervised roles
• Same fiduciary exemption as Director A disapplied for the same period

Channel Island Finance Limited

• Public statement / censure: the GFSC issued a formal public statement highlighting the firm’s contraventions.
  • Contravened section 40 of the LCF Law (breach of discretionary exemption conditions)
  • Contravened section 7 of the Enforcement Powers Law (failure to comply with statutory notices)

This is effectively a reputational sanction — obviously signalling to the market that the firm failed to comply with regulatory obligations.

Aggravating factors

• Deliberate misconduct (accepting a new loan and misleading the regulator)
• Financial benefit received by Director A
• Risk of loss to Person A
• The GFSC stressed that it cannot verify everything itself and must rely on honest disclosure

Mitigating factors

• Person A was ultimately repaid (by a third party)
• Director B did not benefit financially
• Director B cooperated with the investigation
• Early settlement led to sanctions discount – both agreed to settle the GFSC’s investigation before a full enforcement hearing, which allowed the GFSC to discount the severity of sanctions. The GFSC specifically noted this as a mitigating factor, reducing Director A’s financial penalty and reflecting positively on Director B’s cooperation