The Financial Reporting Council – insurance issues
Published 26 February 2015
The Financial Reporting Council has a number of functions in respect of the financial professions, and these include acting as the independent disciplinary body for accountants and actuaries in the UK. It provides a level of regulation for cases which are considered more serious and have a public interest element, other cases being dealt with by the individual chartered bodies of which the relevant individuals are members (the ICAEW for most accountants). It describes itself as the UK's lead audit regulator.
There were significant reforms to the role of the FRC which took effect in July 2012 following consultation. These included creating a new structure for its disciplinary function. A new Executive Counsel to the FRC, Gareth Rees, was appointed in March 2012, and amongst his responsibilities lies the investigation and prosecution of referrals under the independent disciplinary scheme for accountants, which we shall refer to as the Scheme.
The FRC operates the Scheme directly; it is engaged where there is a public interest element of sufficient gravity. It is this element of gravity that makes FRC investigations a matter of such importance to insured firms. The public interest element will often translate into media interest, higher fines and more serious sanctions when misconduct is found. Additionally, the costs associated with FRC investigations can often be high. But how do any of these issues affect insurance?
The first observation must be that insurance policies should not provide cover for fines. Whilst it is sometimes debated in insurance circles, public policy concerns would likely, in practice, prevent cover for fines in any event.
What of defence costs? Suffice to say that the procedure under the Scheme is not dissimilar to civil proceedings, albeit there are more constrained opportunities to reach a settlement. The costs can be significant; there will usually be reputational issues at stake for the accountants or firm concerned. Whether policies will respond to cover the costs of investigating and defending FRC proceedings will depend on the particular policy wording. The ICAEW's minimum wording which was revised in January 2014 provides broad cover for civil liability, awards by an ombudsman and defence costs. However, that is not the only policy on which accountants depend. Finance Directors of companies, for example, will rely upon D&O policies.
So is cover always provided? The answer is that it usually will be, but when cover is triggered will depend on the wording of particular policies.
- Some accountants' policies will extend the definition of "defence costs" or "Claim" to cover regulatory investigations, whilst maintaining the exclusion for fines and penalties.
- Defending proceedings "relating to a Claim". It is slightly less clear cut here, because investigations, and the consequent need for legal advice, can commence before there are any allegations of “wrongful acts” against the individual seeking cover.
- Mitigating a potential "Claim". If the FRC proceedings would provide the backdrop to future civil proceedings, which might then plead in support an adverse outcome to any FRC proceedings, defending the FRC proceedings to (for example) limit the ambit of any admissions given might well come within the definition of reducing or avoiding a claim. Indeed, insurers may wish to provide cover if they feel that that an adverse decision would have a negative impact on a related claim, particularly where there are large numbers of claims.
Since the changes in 2012, the approach of the FRC toward regulation of accountants and actuaries has been increasingly assertive, and the willingness to impose high fines against professional firms is reminiscent of the regulation environment in the United States. In that context appetite for cover for the costs of such investigations is likely to grow. Where there is a market for cover someone is likely to write it.