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DIRECTORS AND OFFICERS NEWS UPDATE
IN THIS ISSUE 2 Personal Accountability: A Checklist for Worried
3 HBOS: Why the Regulators Will Make Sure Things Go Differently Next Time
5 Two of the Most Important Pieces of Cyber Legislation Ever
8 A New Report on the Theme of Personal Accountability Contains a Worrying Conclusion
10 Directors’ Liability Regime Changes – In Force Today!
11 Maritime Corporate Risk Now Has a Human Face in an Increasingly Difficult Regulatory Environment
13 Whistleblowers: You Know they Make Sense if You’re a Regulator!
14 U-Turn on Presumption of Guilt for UK Senior Managers
15 The Email has Gone. But Who’s it Gone to?
Francis Kean an Executive Director in Willis’ FINEX Global is a regular blogger on WillisWire, sharing his expertise with readers.
Francis specialises in insurance for Directors’ and Officers of companies. He joined Willis in 2010 and has 25 years of experience as a leading litigation lawyer specialising in Professional Indemnity, Financial Institutions and Directors’& Officers (D&O) Liability in the London insurance market.
We have pulled together Francis’s blogs from the last quarter and put them in to this easy to read bulletin.
I blogged recently on the recent Treasury announcement (still subject to Parliamentary approval) about the abolition of the presumption of responsibility under the senior managers regime (SMR), due to be introduced in the UK in March 2016. In the same publication the Treasury were careful to point out that:
The same tough underlying obligation will remain on the individual to ensure that they take reasonable steps to prevent regulatory breaches in the areas of the firm for which they are responsible.
I could also tell you that buried in the same publication is the announcement that the Conduct Rules are to be extended to all non- executive directors of banks because:
…there may also be circumstances when it is appropriate to take enforcement action against NEDs, such as when a NED fails to act with honesty and integrity, and it is difficult to justify a position where enforcement action can be taken against relatively junior staff but not against board members.
At the risk of sounding like a stuck record (for those who remember vinyl), the new mantra for regulators both here and in the US is: “It’s all about personal accountability for senior managers”.
So this time round, and especially for those of my readers who are in fact senior managers, I thought I would instead come up with some practical steps for you to consider. The checklist which follows is not necessarily intended to be exhaustive, but assumes a healthy curiosity on the part of a senior executive or non-executive (either in post or considering an appointment) as to the nature and quality of the liability protections that might be available to him or her in the event of a problem with regulators.
REGULATORY LIABILITY PROTECTION CHECKLIST FOR SENIOR MANAGERS
_ With which categories of employee, at what level of seniority, do I share the D&O limit purchased by the company on my behalf?
_ Is my D&O limit also shared with the company itself and, if so, in what respects and to what extent?
_ Is access to my D&O insurance policy dependent on a failure or refusal by the company to indemnify me?
_ Does the company agree to indemnify me in respect of all legal expenses (including, where I consider it necessary, seeking independent legal advice) in my capacity as a senior manager to the extent legally permissible?
_ What cover, if any, is available to me to seek independent legal advice under the firm’s D&O insurance programme in pre- enforcement dealings with regulators?
_ If the answer to 4 and/or 5 above is “No/ None”, has the company considered purchasing additional legal expenses for me in pre-enforcement dealings with regulators?
_ What restrictions are imposed (both by indemnity and insurance) on my freedom to select lawyers of my choice and in the conduct and control of my defence?
_ Does the policy provide a mechanism under which insurers will advance all defence costs and legal representation expenses to me pending resolution of any dispute between the company and the insurers as to the extent of such costs ultimately covered under the policy?
_ What protection do I have against future claims against me if I retire or resign during the policy period or if during such period the company is the subject or object of mergers and acquisitions activity?
_ Does my D&O policy contain provision that enable me to take proceedings which clear my name in appropriate cases?
PERSONAL ACCOUNTABILITY: A CHECKLIST FOR WORRIED DIRECTORS
2 | D&O NEWS UPDATE
http://blog.willis.com/2015/10/u-turn-on-presumption-of-guilt-for-uk-senior-managers/ https://www.gov.uk/government/news/chancellor-announces-bank-of-england-and-financial-services-bill http://blog.willis.com/2015/09/does-the-attorney-generals-memo-mean-the-end-of-the-open-kimono-approach-to-prosecutors/
Much has been written in the last week about the long-awaited report into the reasons behind the collapse of Halifax Bank of Scotland (HBOS). This is hardly surprising given the size of the collapse and the report’s hard hitting conclusions, including the findings that:
_ Its board failed to instil a culture within the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking.
_ There was a failure by the board and control functions to effectively challenge executive management in pursuing this course or to ensure adequate mitigating actions.
The report itself is over 400 pages long, is based on testimony of over 80 witnesses, cost over £7 million and goes into a lot of detail about all of this.
MORE INTERESTING: THE GREEN REPORT Of more interest to me though were the findings of the linked report prepared by Andrew Green QC into the regulators’ enforcement actions following the failure of HBOS.
The Green Report weighs in at a more modest 93 pages plus appendices. It provides some illuminating insights into the approach taken by the Financial Services Authority to the question of enforcement and sheds light on the way in which its successor the Financial Conduct Authority will (and will be able to) do things differently in future.
The overall conclusion of the Green Report is that, “the scope of the FSA’s enforcement investigations in relation to the failure of HBOS was not reasonable.”
You may remember that the only senior individual to be subject to specific investigation and regulatory sanction at the relevant time was Peter Cummings the head of HBOS’ corporate division.
More specifically, the Green Report concludes that:
“The FSA gave no proper consideration to the possibility of investigating any additional individuals including other members of the Board at the date of failure, such as the CEO and Chairman, even though it was apparent to the FSA (certainly to Supervision) that there had been significant problems within the failed bank extending beyond the Corporate Division (including problems in the International and Treasury Divisions)…”
HBOS: WHY THE REGULATORS WILL MAKE SURE THINGS GO DIFFERENTLY NEXT TIME
THE “PROBLEM” OF COLLECTIVE BOARD RESPONSIBILITY As to the reasons for this failure, the Report concludes that it occurred:
“in the context of a regulatory scheme that was ill-suited to the identification of appropriate subjects for enforcement action in circumstances where a banking institution had failed. …the FSA’s regulatory guidance stated that it would only take disciplinary action against an individual where there was evidence of ‘personal culpability’. In the context of a substantial multi-divisional company such as HBOS, where strategy was frequently the result of collective decision-making over an extended period of time, it was inevitably difficult to identify a particular individual whose conduct evidenced ‘personal culpability’.”
With a finding like that, it is not hard to see why politicians and regulators alike are putting so much faith in the Senior Managers Regime. The express purpose of the new regime is of course to facilitate the process of identifying individuals who are to be held personally accountable in the event of a serious failure.
D&O NEWS UPDATE | 3
http://www.bankofengland.co.uk/pra/Documents/publications/reports/agreenreport.pdf http://www.bankofengland.co.uk/pra/Documents/publications/reports/agreenreport.pdf http://www.bankofengland.co.uk/publications/Pages/news/2014/106.aspx http://blog.willis.com/2015/11/personal-accountability-a-checklist-for-worried-directors/ http://blog.willis.com/2015/11/personal-accountability-a-checklist-for-worried-directors/
Whilst the legal principle of collective board responsibility survives, the regulatory focus on individual responsibility is new and may not turn out to sit comfortably with it when the senior managers regime comes into force in March 2016.
THE FEAR OF FAILURE But it is not simply evidential difficulties to which the Green Report directs attention. It also highlights an attitude prevalent in the enforcement division of the FSA in 2009 that “enforcement against big bankers